UNIVERSIDAD DEL CEMA

Buenos Aires

Argentina

Serie

DOCUMENTOS DE TRABAJO

Área: Economía

THE ECONOMIC ANALYSIS OF POPULISM:

A SELECTIVE REVIEW OF THE LITERATURE

Emilio Ocampo

Mayo 2019

Nro. 694

https://ucema.edu.ar/publicaciones/doc_trabajo.php

UCEMA: Av. Córdoba 374, C1054AAP Buenos Aires, Argentina

ISSN 1668-4575 (impreso), ISSN 1668-4583 (en línea)

Editor: Jorge M. Streb; asistente editorial: Valeria Dowding <jae@cema.edu.ar>

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WORKING PAPER

The Economic Analysis of Populism

A Selective Review of the Literature

Emilio Ocampo

UCEMA

Summary:

Economic analysis is essential to the understanding of the rise and fall of populism.

The conceptual and analytical framework of economics to the study of populism is

still in its infancy, but great advances have been made in recent years. This paper

reviews some key contributions behind this progress. When analyzing populism,

economists face two methodological hurdles: lack of consensus and clarity about its

definition and reconciling the populist vote with voter rationality. The former has

plagued sociologists and political scientists for decades. As to the latter, it raises a

conundrum: if populist policies are detrimental to economic growth, as most

economists agree, the vote for a populist candidate suggests some irrationality or

inefficiency in the political markets. But accepting that individuals are irrational when

making political decisions, would imply that they are irrational when making

economic decisions unless, of course, there is something fundamentally different

about political markets. The works reviewed in this paper propose alternative

approaches to address these issues. The most promising line of research in the

economic analysis of populism incorporates and expands concepts developed by

academics in other social sciences such as political theory, sociology, history and

social psychology.

Keywords: Populism, political economy, voter behavior, rationality, democracy.

JEL classification: B2, D72, D78, D83, H0, P47, P48.

Copyright © 2019 Emilio Ocampo.

Special thanks for helpful comments and suggestions to Nicolas Cachanosky, Ariel

Coremberg, Juan Dubra, Jorge Streb and Carlos Waisman. Any mistakes are my sole

responsibility.

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1. Introduction

Where the laws are not supreme, there demagogues spring up.

Aristotle, Politics, Book IV

Democracy is an abuse of statistics.

Jorge Luis Borges

Despite having been described by ancient Greek philosophers as degeneration of

democracy, populism is essentially 20th

century phenomenon (although many

historians consider Napoleon III to be the first successful populist politician). In the

1930s right-wing populism sprang up in Europa first and then in several Latin

American countries, always adapted to the local culture and political situation (in

Mexico it actually surfaced as left wing populism).1 After Second World War,

populism’s fate diverged on both sides of the Atlantic. It disappeared in the Old

World and it thrived in South America, where it became endemic in some countries

such as Argentina. Since until recently, populism was confined almost exclusively to

this region, it did not get much attention from economists, except with a special

interest in Latin America.2 And among them, it was more a subject of history than

theory. Argentina’s early and longstanding attachment to populism made it an object

of particular interest within this sub-field of economics.

Any serious study of populism, even those written by economists, makes reference to

the seminal contributions of political scientists such as Ghita Ionescu, Ernst Gellner,

Isaiah Berlin, Margaret Canovan and Ernesto Laclau, sociologists such as Edward

Shils, Gino Germani and Torcuato Di Tella and historians such as Richard Hofstadter

and John Lukacs. With the exception of Dornbusch and Edwards (1991), economists

are rarely mentioned, even though economic forces play a very important role in the

1 Hitler was the first successful populist politician of the 20th century. However, late stage Nazism was not right-

wing populism but totalitarianism. See Paxton (2004), Finchelstein (2017) and Eatwell (207) for an analysis of the

similarities and differences between populism and Nazi-fascism. 2 The term “populism” is not included in any JEL Code.

4

rise and fall of populism. In fact, no analysis of populism is complete unless it

incorporates an economic dimension.

Things changed in 2016 when Brexit triumphed in the UK and Donald Trump won

the presidency in the United States.3 Since then, populism has increasingly captured

economists’ attention, as evidenced by the number of recently published papers and

articles on the subject (which still significantly lags those produced by political

scientists and sociologists).4 Revealing this newfound interest, in a recently published

book, Nobel-prize winner Jean Tirole (2018) identified populism’s reemergence as

one of the most important challenges currently facing the world’s advanced

democracies:

Throughout the world, populist parties on both the right and left are gaining

ground. Populism is hard to define because it takes many forms, but one

common thread is the exacerbated eagerness to exploit the ignorance and

prejudice of voters. Fanning widespread hostility to immigrants, distrusts of

free trade, and xenophobia plays on people’s fears. Rising populism clearly

has specific causes in different countries, but anxieties about technological

change and employment, the financial crises, the slowdown in economic

growth, rising debt, and increasing inequality seem to be universal factors.

On a purely economic level, the contempt the populist programs have for

elementary economic mechanisms and even for simple public accounting is

striking (pp.28-29).

Tirole believes economists have an important public role in explaining why “certain

economic policies are at best useless, and at worst downright harmful.” To be

effective they have to gain a deeper understanding of what is populism and how it

emerges in a democracy, something sociologists and political scientists have studied

for decades. It is pertinent to ask in which way economic analysis can contribute to a

better understanding of populism. Several questions come to mind: What are the

limitations, if any, of the economic analysis of populism? Are the concepts and tools

of economic theory useful to predict under what conditions populism will likely arise,

3 The populist experiences in the US and the UK are quite unique and probably compared to others in continental

Europe (of both the left and right wing varieties). Trump did not get a majority of the popular vote and Brexit

would not have happened without an unnecessary single majority referendum. 4 A search in the RePEc database shows a six-fold increase from 2000-2004 to 2015-2019 in the publication of

articles that mention populism in their abstract.

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what ideological bias will it take, what kind of policies it will adopt, and what will be

the consequences such policies? What are the determinants of the supply and demand

of populism? Does populism represent an efficient outcome of political markets or

does it reflect an imperfection?

The objective of this paper is to review and summarize the contributions made by

economists to our understanding of populism. These contributions can be grouped

into three major categories. The first comprises works written in the first half of the

20th

century when the Western democracies experienced the first populist wave. The

second group includes works that can be broadly defined as political economy,

including the economic analysis of democracy, voting, social welfare, public choice

and institutions. This literature –which includes seminal works of Arrow (1951),

Downs (1957), Buchanan and Tullock (1962) and North (1990)– is vast and only a

very small selection is included in this review. It is relevant to the study of populism

because it analyzes the conditions that support a well functioning liberal democracy

and those that lead its pathologies. The third group includes works that specifically

analyze populism and populist policies, both at a theoretical and empirical level. This

group constitutes the core of the review, which covers fifty books, journal articles and

working papers published before 2019. Among the works included here are the ten

most cited articles on populism (according to RePEc’s database) and several others

that have received less attention but provide valuable insights. Three quarters of these

works were written on or after 2010; approximately two thirds are descriptive and the

rest theoretical. In terms of their geographical focus, one quarter are related to

Argentina, 22% to Latin America and 30% to Europe and the United States. The rest

have no specific geographical focus. Approximately 40% of the works reviewed have

a JEL code, the most common of which is Microeconomics (D), followed by

Economic Systems (P) and International Economics (F).

The review is partial and reflects the author’s limited knowledge and biases. In most

cases, the works included were published, or are available, in English; in all cases

they were written (or co-written) by economists, which by definition excludes a vast

and valuable literature on populism written by sociologists and political scientists.

The depth with which the works are analyzed is also entirely subjective.

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The structure of the paper is as follows. Section 2, 3 and 4 review the works included

in the three groups described above. Section 5 examines two key methodological

issues that economists need to address to gain a better understanding of populism and

develop useful theories to explain its rise and dynamics. The final section offers some

conclusions.

2. First Encounters: Totalitarianism, Socialism and Democracy

The first direct encounter between the economics profession and modern populism

took place in France in 1848. Frederic Bastiat was not only an economist but also a

legislator in the National Assembly. In that capacity, he unsuccessfully opposed the

election of Napoleon III as the first president of France. Although in his writings he

did not specifically analyze Bonapartism, Bastiat (1860) railed against redistributive

politics and social orders predicated on the “outlandish” principle “take from some to

give to others” and predicted that such policies and orders would inevitably lead to

“pauperism”. Bastiat anticipated many important issues tackled by economists in the

20th

century such as the consequences of voter ignorance and rent seeking behavior.

These issues remain relevant to any analysis of populism (for a summary of Bastiat’s

views see Caplan and Stringham, 2005). Forty years later, the People’s party was born

in the United States. Eichengreen et al (2017) have argued that although it didn’t

succeed in breaking up the two-party system, its emergence had a lasting impact on

American politics. It also introduced the term “populism” in the Western World’s

political vocabulary.5

In the 1930s, economists again confronted populism when its right-wing variety

emerged in Germany and other European countries. 6

It can be argued that Adolf

Hitler was the first successful populist politician of the 20th

century. In contrast to

Mussolini, who rose to power thanks to an attempted coup, Hitler rose to power

thanks to German voters.7 In fact, the Nazi Party program of 1920 did not reject

parliamentary institutions. As noted by a contemporary observer, like all demagogues,

5 Russia’s Narodniks in the 1860s were the first to use the term populist to describe themselves but this was before

the country had any semblance of democracy or parliamentarism. 6 The only Nazi-fascist populist leaders in 1930s Europe were Hitler, Dolfuss (Austria) and Metaxas (Greece), who

rose to power thanks to free elections. Mussolini, Franco and Salazar took power after a coup or military uprising. 7 Although in the 1932 elections Hitler did not get a majority of the votes, the Nazi party held, by a wide margin,

the largest number of seats in the Reichstag. It was Hindenburg who appointed him Chancellor.

7

Hitler “was anxious to gain his power legally” (Neumann, 1938, p.492). However,

most analyses from this period equated Nazism with Stalinism. Although it is true that

in its advanced stage, which started shortly after it rose to power, the Nazi regime

shared strong similarities with the latter, they were different in their origins. Nazism

emerged in a democracy whereas Stalinism arose from a bloody revolution and

murderous purges. What’s missing from the economic analysis of Nazism is how it

used democracy to rise to power.8

Pareto’s many important contributions to economic science are well known. Less so,

at least among economists, are his theories of elites and social evolution (Pareto, 1916

and 1921). Including Pareto in this summary seems appropriate if only because he has

been considered by many one of the ideologues of fascism, which in many ways

inspired Nazism. Pareto sympathized with Mussolini because he believed he would

end the corrupt plutocratic democracy that he despised (Cirillo, 1983). His theories

might be considered more sociological than economic but nevertheless merit

discussion.9 In the aftermath of WWI, the social and political conditions in Italy and

other European countries presaged the rise of right-wing populism. On one hand,

politicians “eager to gain supporters and soothe opponents” were “all too willing to

waste money by extending benefits, subsidizing prices, engaging in unnecessary

public works, militarizing and tolerating disorder”. On the other, citizens were “lazy

and insubordinate” and made “excessive requests that cannot be satisfied” (Pareto,

1921). He could have been describing the supply and demand of populism. In fact,

Pareto anticipated it. “The popular classes are currently more powerful than the well

to do. For this reason the bourgeois state is tottering… Plutocracy is weakening and

demagogy is growing stronger”.

With respect to human behavior, Pareto made two key assumptions. First, for the

most part, it is non-rational and cannot be understood within the context of traditional

economic models. Second, it is motivated by what he defined as “sentiments” (or

basic motivational forces that impel human action), which cannot be observed directly

and change cyclically over time. What mattered, in his view, were aggregate and elite

8 But was not missing from the analysis of sociologists and political scientists (see for example, Neumann, 1938

and Neumann, 1942). 9 Pareto’s sociological theory encompasses four volumes and more than a thousand pages which make it

impossible to condense in a few paragraphs.

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sentiments. Social order behaved cyclically reflecting the conflict of centripetal

(concentration of power) and centrifugal forces (erosion of power), which in turn

reflected the ebb and flow of such sentiments. Only elites could change the course of

history. Two types of elites exist in Pareto’s theory: governing and non-governing.

The former was divided into two sub-types: one preferred to rule primarily through

consensus (parliamentarism) and the other primarily through the use of force

(militarism). Representative democracy inevitably gave way to a plutocracy

dominated by one or the other elite in a cyclical manner (Pareto called this process the

“Plutocratic Cycle”). Under a parliamentary system, wealthy speculators and wage

earners (particularly factory workers) allied themselves to impose a “demagogic

plutocracy” that ruled “through cunning or by making promises to the masses… those

who do not pay taxes are allowed to impose taxes on others” (basically, populism).

Pareto considered this system the most insidious form of government, as it was more

concerned with redistributing existing wealth than with creating new one, and held

power by manipulating “the sentiments of the masses”. Over time, an inevitable

economic stagnation and a social reaction would lead to an elite change and a military

plutocracy would emerge. Social control would shift from parliamentarism to force.

This is why Pareto is said to have forecast the rise of fascism. In reality, he predicted

that democracy would oscillate cyclically between militarism and left wing

populism.10

In his view, democracy was an “illusion”, nothing more than “an

indeterminate and transitory” condition.

Schumpeter was as skeptical as Pareto about democracy and as convinced of the

importance of elites. In Capitalism, Socialism and Democracy (1942), he introduced

several ideas that are relevant to the analysis of populism. The main focus of the

book, however, was to analyze whether socialism would inevitably replace capitalism

and whether it was compatible with democracy. Schumpeter answered affirmatively

to both questions. In his view, capitalism would be a victim of its own success. And

the agents of its destruction were not demagogues but rather intellectuals, such as

Lenin, who goaded the masses into revolt:

10 Seems like a good approximation to Latin American political cycles in the second half of the 20th century

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The masses have not always felt themselves to be frustrated and exploited.

But the intellectuals that formulated their views for them have always told

them that they were, without necessarily meaning by it anything precise.

Schumpeter also proposed a theory of democracy that rested on two major

assumptions. Firstly, voters are irrational. The average voter “expends less disciplined

effort on mastering a political problem than he expends on a game of bridge (p.261)”

and tends “to yield to extra-rational or irrational prejudice and impulse (p.262).” To

understand human nature in politics, then, Schumpeter recommended reading the

works of Freud (1922) and Le Bon (1896). Secondly, the “will of the people” is a

chimera that the will of the majority could never represent. It is the “product and not

the motive power of the political process.” In Schumpeter’s view, democracy is

simply an “institutional arrangement for arriving at political decisions in which

individuals acquire the power to decide by means of a competitive struggle for the

people’s vote (p.269)”. In other words, it is a mechanism to ensure competition for

political leadership. Although Schumpeter never addressed populism or demagogy in

his book, he emphasized that for an “active hostility” against a social order to exist, it

was necessary “that there be groups to whose interest it is to work up and organize

resentment, to nurse it, to voice it and to lead it (p.145).” So, in Schumpeter’s theory

it wasn’t demagogues who played the key role in overturning capitalism, but

intellectuals and special interest groups. Surprisingly, Schumpeter devoted very few

words to Nazi-fascism. He must have believed it posed no real threat to capitalism

despite the evidence to the contrary. Within his theory of democracy, fascism was a

political method of monopolistic leadership (distinct from Stalinism which was a

military autocracy). Schumpeter believed that if socialism prevailed in the United

States, it would likely present “fascist features”. He also thought that exalting

“national unity into a moral precept spells acceptance of one of the most important

principles of fascism (p.352).” The same could be said about populism.

Almost forty years later, Samuelson (1980, 1981), argued that although Schumpeter

was wrong in his belief that capitalism is economically stable but politically unstable,

he was right “in believing that populist democracy would alter the nature of the

market economy.” This is odd given that Schumpeter never used the term “populist

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democracy” (or refer to populism in his book). Samuelson went on to propose his own

theory of populism:

The same gasoline that classical economists thought ran the laissez faire

system, namely self-interest, will in the context of democracy lead to use of

the state to achieve the interest of particular groups. It is a theorem of von

Neumann’s theory of games that this should be the case. Long before Marx,

John Adams and Thomas Macaulay warned that giving votes to all would

mean that the poorest 51 percent of the population would use their power to

reduce the affluence of the richest 49 percent. Stagflation, upon which I

could write a very long book, is one important manifestation of what is

implied in this fundamental diagnosis (1981, p.43).

Samuelson (1980) argued stagflation was an inherent feature of the mixed economy.

In fact, “it was rooted in deep in the humane nature of the welfare state”. In his view,

there was no guarantee that the forces of democracy would “converge” to optimal

government interventions in the economy and forsake “all other temptations that

involve deadweight loss and distortion (p.895).” As a result, the mixed economy

prevalent in the Western World had turned into a zero-sum game. Samuelson

reformulated Schumpeter’s prediction by replacing capitalism with stagnating mixed-

economy and socialism with Latin American style populism. “If you want to read the

shape of things to come, perhaps you should turn your gaze from Scandinavia and

toward Argentina (1981, p.44)”. His dire prognosis may have seemed exaggerated

back then. It seems more plausible today.

The shadow on the wall for all of us, I fear, is not the totalitarian revolution

of a Lenin or Mao. It is not a relapse into the laissez fair of Queen Victoria or

President Coolidge. Argentina, I dare to suggest, is the pattern which no

modern man may face without crossing himself and saying: “There but for

the Grace of God…” (1971, 523.)

Hayek (1944), on the other hand, took a radically different approach. First, he didn’t

believe socialism (including national-socialism) was compatible with liberal

democracy. Second, he predicted socialism (loss of economic freedom) gradually but

inevitably led to totalitarianism (loss of political freedom). In other words, the end of

capitalism would mean the end of liberal democracy. As was common in that era,

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Hayek equated Nazi-fascism and Communism. Both conclusions were in great

measure the consequence of an essential feature of totalitarian systems: the

concentration of power in the hands of people who are the most likely to abuse it.

This feature, in turn, resulted from the simultaneous action of three “negative

selection factors”. First, unanimity of values and beliefs can only be sustained by

appealing to the lowest common denominator. “The largest group of people whose

values are very similar are the people with low standards,” explained Hayek.

Secondly, sycophancy and loyalty to the leader are also more likely in that same

group of people: “those whose vague and imperfectly formed ideas are easily swayed

and whose passions and emotions are readily aroused who will thus swell the ranks of

the totalitarian party.” Third, and more importantly according to Hayek (and I would

add particularly and directly relevant to the contemporary analysis of populism):

It seems to be almost a law of human nature that it is easier for people to

agree on a negative programme, on the hatred of an enemy, on the envy of

those better off, than on any positive task. The contrast between the ‘we’ and

the ‘they’, the common fight against those outside the group, seems to be an

essential ingredient in any creed which will solidly knit together a group for

common action. It is consequently always employed by those who seek, not

merely support of a policy, but the unreserved allegiance of huge masses.

From their point of view it has the great advantage of leaving them greater

freedom of action than almost any positive programme. The enemy, whether

he be internal like the ‘Jew’ or the ‘Kulak’, or external, seems to be an

indispensable requisite in the armoury of a totalitarian leader (p.143).

This “we versus they”, “friend versus enemy”, “good versus bad” Manichean

dichotomy is the essence of modern populist discourse (see Laclau, 2005). The three

negative selection factors Hayek described also operate in populist regimes of any

ideology. In fact, as he pointed out, the last one resulted from “the deliberate effort of

the skillful demagogue” seeking “to weld together a closely coherent and

homogeneous body of supporters.” When the least principled and least ethical

individuals rise to the highest echelons of government, the consequences are

predictable: corruption, economic inefficiency, abuse of power and loss of individual

freedom. The evidence shows that in populist regimes, there is comorbidity of

kakistocracy (government of incompetent) and kleptocracy (government of the

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corrupt). Also, and more importantly, as the Venezuelan experience shows, the road

to serfdom (and poverty) can also be paved by populism.

3. Democracy and Institutions

The analysis of democracy has been a main focus of political economists since at least

the beginning of the 20th

century when it started to extend over most of the Western

World. With a few exceptions, most of the seminal works in this field were written

after the Second World War. None of these works, however, ever mention populism.

Most likely, because their authors never imagined that its emergence was a realistic

possibility in advanced democracies. The works included in this section can be

divided into four subgroups. The first analyzed the conditions under which liberal

democracy worked. The second studied how the interaction of voters, politicians,

bureaucrats and public officials in a democracy lead to collective decisions that lead

to sub-optimal results from an economic standpoint (e.g., clientelism, pandering, rent-

seeking behavior, corruption, crony capitalism, etc.). These inefficiencies or

“pathologies” of government or democracy do not necessarily imply the existence of

populism, but, when combined with other features (such as an Manichean political

discourse and institutional degradation), they usually characterize it. The third

subgroup explores under what circumstances income and wealth redistribution are

most likely to arise in a democracy while the fourth examined what institutional

setting is more favorable to sustained economic growth.

4.1 Economic Analysis of Democracy and Voting

The publication of Kenneth Arrow’s seminal articles on social choice and individual

values (1950 and 1951) marked a major turning point in the economic analysis of

democracy. Basically, Arrow demonstrated that no voting system can consistently

convert ranked individual preferences into a ranked aggregate preference. As political

scientist William Riker pointed out, the conclusions of Arrow’s “impossibility

theorem” are devastating for any justification of populism.11

First, they consigned

democratic outcomes and hence the democratic method to the world of “arbitrary

nonsense” (Schumpeter would have agreed). Second, they undermined the logical

11 Riker was not an economist but a political scientist but he applied both mathematics and game theory to the

analysis of political problems.

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foundations of populism: the view that in a democracy the vote of the majority

expresses “the will of the people” (Riker, 1982).12

Romer (1996) analyzed the political economy of entitlements and developed a model

in which anger, punishment and revenge drove the decision to vote. Maskin and

Tirole (2004) developed a model with rational voters that captured the advantages and

disadvantages of making legislators, bureaucrats and government officials

accountable through reelection. The model predicts that when decision-making

powers should be allocated to the public directly (direct democracy), to politicians

(representative democracy) or to non-accountable judges (judicial power). The model

has two periods and assumes voters are rational, have homogeneous preferences but

limited information. Importantly, however, they can learn. In each period, voters have

to choose between two policies: A and B. They can do it directly (direct democracy)

or by delegating the decision to a politician that knows which policy is the best

(representative democracy). Politicians are driven by two motivations. First, they

want to leave a legacy, i.e., be remembered for having done great things. Second, they

like power. When the first motivation dominates it denotes statesmanship, if the

second dominates it denotes opportunism. Politicians’ preferences can be congruent

or incongruent with those of the representative voter. Although voters ignore if

politicians are congruent they make them accountable with regular reelections. This

can induce a non-congruent politician to act in the public interest and “weed out” non-

congruent public officials. However, reelection may induce a politician may choose a

policy, not because it is “right” for society, but because it is popular with voters (who

ignore its consequences). In other words, she may pander to public opinion, which is

exactly what populist politicians do (however, not all pandering denotes populism).

Such behavior would conflict with the rationale for a representative democracy (i.e.

representatives can make better decisions than ordinary citizens). Maskin and Tirole

emphasize another important point relevant to populism: if minority rights are a

concern, the ability to remove officials from office through reelections (even if they

are congruent) may give the majority too much power. In theory, both concerns are

mitigated by a republican constitution. Maskin and Tirole show that under certain

conditions (such as no feedback to voters after period 1), pandering is the equilibrium

12 This conclusion remains valid irrespective of citizen preferences (Ingham, 2018).

14

solution in a representative democracy.13

It is important to note however that

pandering is a necessary but not sufficient condition for the existence of populism

(see Section 6).

4.2 Public Choice and Democracy’s Pathologies

Another important turning point in the economic analysis of democracy and public

policy was the emergence of the school of Public Choice (Downs, 1957; Buchanan

and Tullock, 1962; Olson, 1965). Influenced by Wicksell’s work on public finance,

economists enrolled in this school applied the assumptions of neoclassical

microeconomics to the analysis of political decisions and collective action problems.

An important conclusion of Public Choice theory is that politicians and public

officials are not loyal public servants solely concerned with maximizing public

welfare and satisfying the people’s will, but, rational individuals that seek to

maximize their own utility and advance their own interests (1957b). A populist leader

is an extreme case of an opportunistic politician intent on satisfying his or her own

ambition at any cost.

Downs (1957a) proposed the hypothesis that voters are not irrational but rationally

ignorant. As Schumpeter had already pointed out, the majority of citizens don’t have

the time or willingness to educate themselves about the details of the candidates’

platforms. Instead they delegate that job to the experts. Insofar their vote is not

decisive, their incentive to educate themselves politically or seek information about a

politician’s proposals will be minimal. Generally, Public Choice economists argue

that inefficient outcomes in the political market are the result of agency problems or

asymmetric information and not due to voter irrationality.

Olson (1965) demonstrated the inappropriateness of extending predictions of

individual rational behavior to the behavior of groups made of rational individuals.

Smaller groups with homogeneous member interests tend to be more effective than

larger heterogeneous groups. Concentrated benefits and highly distributed costs create

strong incentives for groups to influence public policy. This has important

implications in the political arena, not only with respect to lobbying activities but also

13 In his recent book, Tirole doesn’t seem to agree with this conclusion.

15

to crony capitalism more generally, which is typical feature of populist regimes.

Following the pioneering contributions of Tullock (1967) and Krueger (1974), the

rent-seeking literature expanded rapidly. Murphy, Shleifer and Vishny (1993) posited

the hypothesis that private and public rent-seeking behavior is highly detrimental to

economic growth because it has increasing returns (making it more attractive than

producing activities) and it stifles innovation. They also made two other important

points: a) an economy can be stuck in a “bad” equilibrium in which rent seeking is

high and output is low and only a radical reform can move into a “good” equilibrium,

and b) an economy in a good equilibrium can slide into a bad equilibrium as result of

a war, a coup or social unrest that reduces productivity and undermines property

rights. Acemoglu and Robinson (2006) argued that elites may oppose superior

institutions and technologies because their adoption may reduce their political power,

which could partly explain why underdeveloped countries can get stuck with populist

regimes.

Barro (1973) developed a political agency model that showed that regular elections

are an appropriate incentive device for disciplining self-interested politicians (i.e.,

would prevent populist from gaining power). Nordhaus (1975) contradicted this thesis

with a model in which voters are shortsighted and ignorant and government officials

are driven only by their prospects for reelection. Put simply, politicians played along

the Philips Curve. In some respects, Nordhaus’ model of political business cycle can

be considered a precursor of modern theories of populist cycles. Maskin and Tirole

(2014) developed a model of pork-barrel politics in which a politician tries to improve

her re-election chances by directing public spending to targeted interest groups. By

doing so, she signals that she shares their concerns. This is what populist politicians

would typically do. In this case, any rational voter motivated by his self-interest

would reelect a politician who would benefit him through some kind of transfer. The

underlying assumption is that the electorate doesn’t know which are the politician’s

preferences with respect to pork barrel expenditures. Politicians thus have an

incentive to send a signal to voters that they care about their interest. Maskin and

Tirole conclude that pandering worsens the fiscal deficit if either the politician’s

overall spending propensity is known, or if it is unknown but the effect of spending

on the deficit is opaque to voters. By contrast, if there is enough deficit transparency

an unknown spending propensity may induce a politician to exhibit fiscal discipline.

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4.3 Democracy and Income Redistribution

Income redistribution does not imply populism but populism always entails some

form of income or wealth redistribution.14

Focusing on voters rather than politicians,

the so-called “Director’s Law” enunciated by Stigler (1970) states that the rise of

public spending (which implies income redistribution) benefits mostly the middle

class and is paid for by the rest of society. Starting from the fact that in most

advanced democracies the middle class is the single largest voting block and

dominant interest group, Stigler argued that it exerted its electoral influence to

maximize the benefits it received from government at the lowest costs. Following

Stigler’s idea, Dixit and Londregan (1998) developed a model that explains how the

ideological motive for redistribution mixes with the tactical and political motives to

determine tax and transfer policies. Feld and Schnellenbach (2007) argued that

Stigler’s theoretical framework cannot explain the growth in public spending in the

developed world. In other words, it is not entirely consistent with Director’s Law.

They argue that a more precise enunciation of this law is that, in modern democracies,

in which taxes and spending can be directed to specific interest groups, middle and

lower income voters sometimes coalesce to fiscally exploit high-income voters.

Romer (1975) and Meltzer and Richard (1981) posited the hypothesis that a widening

gap between the income level of median and average voters (a measure of inequality),

will lead to higher taxes and income redistribution, This would seem obvious: against

an increase in inequality politicians will respond raising taxes paid by the rich (who

are an electoral minority) and redistributing the proceeds to the majority. A corollary

of this theory is that in a democracy, inequality will tend to go down. This has not

been the case in the US, at least since the 1980s. In fact, the opposite has actually

happened and several theories have been proposed to explain why (Acemoglu, Naidu

and Robinson, 2013). The evidence from OECD countries suggests that when the

middle class feels it is farther away from the rich it forges an alliance with the poor to

vote in favor of redistribution (Lupu and Pontusson, 2011).

14 Even right wing populist movements resort to redistribution by confiscating the resources of ethnic or religious

minorities considered to be the “enemies of the people”.

17

Becker (1983) developed a theory of income redistribution that builds on the

competition among pressure groups for political favors. In his model, political

equilibrium depends on the efficiency of each group in generating pressure, the effect

of additional pressure on their influence, the number of persons in different groups,

and the deadweight cost of taxes and subsidies. An increase in the latter discourages

pressure by subsidized groups and encourages pressure by taxpayers. In Becker’s

model governments correct market failures and favor the politically powerful.

Interestingly, in this paper Becker seemed to question the assumptions of rational

choice model in politics when he stated that voter preference are not independent and

can be manipulated “by interested pressure groups” (p.392).

Alesina and Rodrik (1994) hint at populism with a model that links political systems

with distribution of income and wealth. Their model predicts that democracies with

high levels of inequality should exhibit lower growth, technocratic dictatorships

would show higher growth, independently of inequality whereas “populist” non-

democratic governments would implement redistribution and experience lower

growth. Despite this reference, the authors do not define what a populist government

is, but that they incorrectly associate it with lack of democracy. McGuire and Olson

(1996) argued that in a democratic setting, a super-encompassing majority, even when

it thinks only of itself and has no concern for the losses of minorities, will abstain

from redistribution and will treat minorities as well as it treats itself. In essence, their

model suggests the impossibility of extreme forms of populism in advanced

democracies. Reality suggests otherwise.

Alesina and Angeletos (2005) postulate that different beliefs about fairness and

income inequality influence redistributive and tax policies. If a majority of voters

believes that individual effort determines income, and that all have a right to enjoy the

fruits of their effort, it will choose low redistribution and low taxes. In equilibrium,

effort will be high and the role of luck will be limited, in which case market outcomes

will be relatively fair and social beliefs will be self-fulfilled. On the other hand, a

society in which a majority believes that luck, birth, connections, and/or corruption

determine wealth, will tend to levy high taxes on high-income voters, thus distorting

allocations and making these beliefs self-sustained as well. The latter situation tends

18

to be typical of countries in which populism is endemic, which suggests that culture

has a strong influence.

These explanations of the dynamics of redistribution in a democracy are relevant to

any analysis of populism. The evidence suggests that a persistent relative stagnation

of middle class income (vis-à-vis high income voters) will most likely lead to some

form of populist redistribution. However, it is important to emphasize that income

redistribution does not necessarily imply populism (although populism always implies

some form of income or wealth redistribution).

4.4 Institutions and Economic Growth

As Aristotle, Polybius, Cicero and many others pointed out, populism always requires

institutional degradation, i.e., it is a choice to de-institutionalize. The relationship

between institutional quality and economic growth postulated by NIE economists

reinforces the notion that populism is antithetic with long-term sustainable growth.

The institutional approach as articulated by North (1993, 1994 and 2010) provides

valuable insights to the analysis of populism. North rejects the rationality assumption

in political markets. In his framework, ideologies and institutions are created and

provide closely shared perceptions and ordering of the environment. Ideas matter, and

the way in which they evolve and are communicated, is key to understanding how

societies are structured and also evolve. Economic performance is a consequence of

the institutional framework, which in turn is a function of the shared mental models

and ideologies that prevail in society. The process of learning creates path-

dependence in ideas, ideologies and consequently also in institutions (North and

Denzau, 1994). This emphasis on values and beliefs, ties in with the literature that

emphasizes the link between culture (or social capital) and economic growth (for a

summary see Guiso, Sapienza and Zingales, 2010).

These considerations are very relevant to the analysis of populism. First, populism

implies a sub-optimal institutional choice, which basically suggests the existence of

impediments in the collective learning process (or some kind of collective amnesia).

The populist narrative proposes a cognitive model, that by confusing cause and effect,

impairs learning. If the populist narrative prevails, it leads to the adoption not only of

policies, but also institutions, that are detrimental to economic growth. Under certain

19

circumstances, the resulting stagnation and/or crisis makes populism even more

attractive, because in the populist model it is the consequence of other factors (for

example, a conspiracy by Wall Street bankers or the IMF). This may explain why in

certain societies like Argentina populism is endemic. For obvious reasons, populist

politicians have a strong interest in promoting the “wrong” model (ideology) to

interpret reality. This is one of the reasons why once in power they give so much

importance to control of the media. If populism reflects an imperfection (or failure) of

the collective “cultural” learning process, explaining its origin requires understanding:

a) how certain values and beliefs that hamper that process became predominant in the

electorate, and b) in which way they filter the impact of social, demographic and/or

economic the exogenous shocks that eventually generate frustration.

Acemoglu, Johnson and Robinson (2005) and Acemoglu and Robinson (2012) posit

that the evolution of a society’s institutional evolution results from the interaction of

interest groups, critical junctures and drift. Inclusive institutions –both political and

economic– lead to sustained economic growth. However, political institutions

dominate, i.e., democracy is a necessary condition for such growth. This conclusion

has been challenged on both theoretical and empirical grounds. Glaeser, La Porta,

López-Silanes and Shleifer (2004) argued that growth and education actually lead to

the establishment of democracy. The Argentine experience since the middle of the

20th

century seems to refute both arguments: an educated society that chose to

degrade its democracy and its economy by embracing populism. From a different

perspective, Caplan’s theory of voter’s rational irrationality also challenges Acemoglu

and Robinson’s thesis as there is no guarantee that voting will lead to good economic

policies.

Acemoglu, Robinson and Verdier (2004) developed a model to explain why many

developing countries fall under regimes that expropriate private resources (or

misappropriate public ones) and adopt policies that are highly inefficient in order to

enrich themselves and remain in power. Kleptocracy has been an enduring

characteristic of populist regimes in Latin America. Robinson, Torvik and Verdier

(2006) studied the link between institutions and the natural resource curse. Their

model predicts that at times of resource booms, incumbents will have an incentive to

pursue populist policies to increase their chances of re-election. Whether they succeed

20

or not is determined by the quality of the country’s institutions. However, this model

does not contemplate the hypothesis that populism a) essentially implies an

institutional degradation, and b) seems to be an endogenous response to a boom in

prices. Robinson and Verdier (2013) analyzed the political economy of clientelism.

Their model provides an explanation for why much income redistribution takes an

inefficient form, particularly employment in the public sector. A job is a credible way

of redistributing when it provides rents (such as in situations with moral hazard), and

employment is optimal ex post. Moreover, a job is selective and reversible, and thus

ties the continuation utility of a voter to the political success of a particular politician.

Robinson and , show that the need to make offers of employment incentive-

compatible leads to inefficiencies in the supply of public goods. They also show that

such redistribution becomes relatively attractive in situations with high inequality and

low productivity (as it is the case in many developing countries). Inefficiency is

increased when the stakes from politics are high, when inequality is high, and when

money matters less than ideology in politics. Again, these are very relevant

considerations to any analysis of populism, particularly the variety predominant in

Latin America.

4. The Economic Analysis of Populism

This section reviews works by economists that specifically analyzed populism and

populists policies. The section is divided into two broad subsections: a) generic

theoretical analysis of populism and b) theoretical and empirical studies that focus on

a specific country or region. The first subsection is divided into two subcategories: the

first includes works that assume voters are rational (Neoclassical) and the second that

they are not (Behavioral). The second subsection is in turn divided into three

subcategories: a) Argentina, b) Latin America and other developing regions, c)

Europe and the US.

4.1 Neoclassical

Following the approach taken by Romer (1996) and Rabin’s model of reciprocal

altruism (1993), Glaeser (2004) developed a model of supply and demand of hatred.

In other words, he explained how opportunistic politicians promote hatred (or

resentment) towards certain ethnic or religious minorities and why this narrative

21

results convincing to a majority of the electorate. Glaeser used this conceptual

framework to analyze the evolution of anti-black hatred in the United States South,

episodes of anti-Semitism in Europe, and the recent surge of anti-Americanism in the

Arab world. Glaeser points out that, at group level, most inter-personal hatred is based

on personal experience, but inter-group hatred is generally based on narratives about

the supposed crimes of the hated group. In Glaeser’s model, false narratives prevail

with rational voters when those voters have little incentive to learn the truth behind

them. Basically, the politician acts as an entrepreneur that promotes a narrative of

resentment, and the voter as a consumer that can buy that narrative. When minorities

are very different along a politically relevant dimension (e.g., their income levels,

ethnics or religion), an opportunistic politician has a strong incentive to propose a

narrative that generates resentment against them. Voter predisposition to believe this

narrative is a function of the costs and benefits of acquiring information (education).

Costs tend to be lower for educated people. The model predicts that, caeteris paribus,

a narrative of hatred will be more convincing in the less educated segments of society.

Another important conclusion is that hatred only affects the voting intentions of the

middles class. High-income voters will always vote for a politician that opposes

income redistribution and lower income voters will do the opposite. Middle-income

voters will shift from one side to another depending on the minority that is made the

target of the hatred narrative. It is likely that left wing candidates will promote hatred

towards the rich minority while right wing candidates will do so against ethnic or

religious minorities. Although some of these conclusions are obvious, Glaeser’s

model confirms them rigorously. Despite its usefulness, his approach seems

reductionistic. Voter predisposition towards a narrative of hatred seems to be more a

function of predominant cultural values than a cost benefit analysis. Since hatred (or

resentment) is a critical ingredient of the populist politician’s discourse that gets him

or her a majority of the votes, Glaeser’s theory of hatred is in essence also a theory of

populism, although the word populism does not appear in his paper.

Drawing on earlier literature on lobbying, Campante and Ferreira (2007) built a model

of lobbying with imperfect commitment that explains how lobbying leads to

inefficient outcomes. The model confirms the intuition that lobbyists are those who

find it most worthwhile to spend their resources in that activity, rather than in

production. Their success in shifting government behavior away from the optimal is

22

likely to benefit inefficient sectors. They also conclude that if lobbies representing

“the poor” and “the rich” have identical organizational capacities, equilibrium is

biased towards the former, who have a comparative advantage in politics in relation to

productive activities. However, pressure groups differ in their organizational capacity,

both pro-rich (oligarchic) and pro-poor (populist) equilibria may arise, all of which

are inefficient with respect to the constrained optimum. In Campante and Ferreira’s

model, populism is very narrowly defined as redistribution of public resources to

lower income groups.

Based on the model accountability built by Maskin and Tirole (2004), Binswanger

and Prüfer (2009) developed a model of policy choices that shows the conditions

under which populism is an equilibrium solution. In this model, voters and politicians

play a political game over two periods in which the adoption of populist policies is a

function of the level of sophistication of voter beliefs. Voters are perfectly rational.

Every voter is endowed with an opinion about which policy maximizes his expected

utility. Although voters’ opinions may be heterogeneous, the policy that maximizes

voters’ utility is identical for all voters. In addition, voters are also endowed with a

belief about the strategic behavior of politicians, i.e. how they set a certain policy

based on their information. Rationality depends on the level of voter sophistication,

which is implied by the order k of what they call level-k beliefs (voter rationality goes

from bounded to full depending on the level of k). There are two types of politicians:

competent and incompetent. Both receive a signal indicating which policy is optimal:

the competent type’s ex ante perfectly reveals the optimal policy, whereas the

incompetent type’s is noisy. Based on these signals, the strategy that maximizes

voters’ utility is to elect a politician for period 2 who is perceived as competent. To

get reelected, politicians have an incentive to pander to the median voter’s opinion.

However, a noisy signal before the election reduces such incentive. Voters use these

signals to form a “posterior opinion” to evaluate an incumbent’s competence using

Bayes’ rule. Being better informed, a competent politician is more successful at

anticipating the median voter’s posterior opinion and hence faces a higher probability

of being reelected. According to the model, the level of k determines whether a

politician will adopt populist policies. For a finite k, a separating equilibrium occurs

in which competent and incompetent politicians implement different policies. This

equilibrium is characterized by only partial populism in that both the politician’s

23

signal and the median voter’s opinion have a positive weight in affecting the policy

choice. Limited strategic sophistication of voters weakens politicians’ incentive to

pander to public opinion because politicians know that voters expect them to pander

less than fully. Thus, pandering is limited even if politicians are exclusively office-

motivated and do not care about voters’ welfare. In contrast, for an infinite level of k,

a pooling equilibrium results in which both types of politician implement populist

policies. In this case the results are exclusively determined by the median voter’s

prior opinion about the optimal policy and do not depend on the incumbent

politician’s signal at all.

Also building on Maskin and Tirole (2004), Fernández (2015) developed a model of

rational populism in which the decision to vote for an opportunistic politician is

rational in a scenario of uncertainty and asymmetric information.15

In this model a

populist politician is prepared to propose any “popular” measure to be elected (or

reelected), even when he or she knows that such measure will be detrimental to

overall welfare. As in Maskin and Tirole’s model, a politician’s preferences can be

congruent or incongruent with the electorate. A politician is “impenitent” if the

electorate doesn’t punish her and she gets reelected for a second period. A successful

populist leader would be the typical opportunistic and impenitent politician. In

Fernandez’ model, voters are rational but have limited information. They don’t punish

populist politicians because they don’t know enough at the time of the election. In

contrast to Maskin and Tirole, Fernandez doesn’t incorporate learning by voters. As

mentioned earlier, failure to learn is a sign of irrationality, particularly if mistakes are

costly and recurring evidence is available. This seems particularly relevant in the case

of Argentina, where populism has dominated elections for the last seventy years.

Based on his model, Fernández proposes several conclusions: 1) populist policies are

not the result of politician’s ignorance, 2) populism does not necessarily arise out of

voter insatisfaction or their need for a hegemonic redemptive leader, 3) the

preservation of populism requires the absence of a solid institutional system that

facilitates the impunity of opportunist politicians (lack of accountability), 4) it is more

reasonable to assume that opportunistic politicians will always exist and that their

aspiration to become a “hegemonic leader” but simply an ambition to win reelection

15 This work was published in Spanish.

24

and remain in power, 5) an essential part of a better control of opportunistic

politicians is term mandates and accountability a la Maskin and Tirole to dismiss

incongruent politicians, 6) absence of a suitable informative regime (transparency),

managerial audits, an independent judiciary, federalism and restraints on opportunistic

behavior by politicians favor the rise of populism. Many of these deficiencies are,

according to Fernández, not the result of the lack of institutional development, but

instead result from the destruction of pre-existing institutions in the hands of populist

politicians (as in the case of Argentina). Given Fernández’ vast experience as a public

official and interaction with populist politicians over several decades, these insights

deserve serious consideration. However, his dismissal of the importance of culture

and beliefs and the “frustration gap” (see section 6 for a definition of this term) as

factors that facilitate the rise of populism don’t seem to square with the evidence.

Dovis, Golosov and Shourideh (2016) developed a neoclassical model to analyze the

interaction between external borrowing and redistributive policies in an open

economy without commitment. Using a tractable heterogeneous-agent overlapping

generations framework where government’s redistributive motives determine fiscal

policies, they study a repeated game between the government, households, and

foreign creditors. The key insight of this model is that the current and future

governments disagree on the composition of inequality and external debt, and that this

disagreement gives rise to cyclical dynamics. The current government prefers to

finance any given level of current consumption with a higher level of debt and lower

inequality than the future government does. The reason is that delivering a unit of

consumption via borrowing is cheaper than via production, since it does not incur the

disutility of effort (as well as inequality in consumption and leisure). The future

government, however, prefers that consumption be financed with lower debt and

higher inequality. This is because the future government does not incur the leisure

cost of production and the cost of inequality of consumption and leisure. The authors

conclude that populist cycles, as described by Dornbusch and Edwards (1991a,

1991b), can arise endogenously in such settings due to inequality and weak

institutions. Their model is useful to understand the dynamics of such cycles in Latin

America since the 1970s and Southern Europe since the 2008 global financial crisis.

However, the definition of populism adopted by Dovis, Golosov and Shourideh is too

25

narrow to extend their model’s conclusions to other countries/regions or to understand

other varieties of populism.

Prato and Wolton (2018) analyze how voters’ demand for economic reforms

influences the success of populist candidates. They describe a form of “rational

populism” that is a function of politicians’ electoral incentives. The model rests on

two key assumptions. First, voters are rational but poorly informed and not able to

distinguish “good” from “bad” policy reform, i.e. they are rationally ignorant. The

electorate has a demand for reform proportional to the gain expected from a

successfully implemented reform relative to the status quo. This demand can be due

to variety of exogenous factors (for example an oil shock or a global financial crisis),

i.e. due to a widening frustration gap. Politicians can be defined along two

dimensions: competence and attitude towards the status quo. Only competent

politicians can carry out beneficial reforms; incompetent candidates always

implement botched reforms, which produce worse outcomes than the status quo for

the electorate. Voters pay close attention to the campaign to discover whether a

candidate’s platform proposes a reformist platform or favors the status. However,

even if they learn that a candidate is reformist, they cannot tell whether she is

competent. This prevents them from anticipating the probability that reforms, if

enacted, will be successful. In this model, a populist candidate is simply an

incompetent opportunistic politician that proposes reforms despite knowing that she

will be unable to carry them out successfully. If demand for change is high the best

scenario for voters is that only competent candidates run. Ironically, according to this

model competent reformism is possible only if such demand is low. When demand is

high, incompetent candidates will find it optimal to adopt a reformist platform to

improve their chances of getting elected. Even in the best possible scenario, there is

no reform without the risk of populism. Prato and Wolton argue that populism arises

due to the existence of opportunistic politicians, not because of voters’ demand for

reform. They also suggest that the rise of populism may cause political

disenchantment rather than the other way round. This conclusion seems

counterintuitive. It basically implies that many common policy prescriptions to fight

populism are self-defeating. For example, policies that facilitate the acquisition of

political information would increase the electoral reward of proposing a reformist

agenda and therefore increase incompetent politicians’ incentives to engage in

26

populism. There are several problems with this approach. First, it precludes (ignores)

the impact of learning. Secondly, it ignores the relationship between the populist

narrative and voters’ values and beliefs. Third, populist candidates are successful

because they can articulate an explanation for society’s woes that is both convincing

and emotionally appealing to a majority of voters. Fourth, the theory is contradictory.

Prato and Wolton argue that populism generates voter disenchantment and not the

other way around. But what they define as voter demand for reform reflects an

underlying disenchantment (what I call the “frustration gap”). Finally, populist

politicians are better defined by other characteristics besides incompetence to carry

out reforms (in fact they are quite competent in getting votes).

4.2 Behavioral

The application of behavioral economics to politics is still in its infancy but growing

rapidly (see Schnellenbach and Schubert, 2015, for a summary). The intersection of

psychology and economics has led to many fruitful insights, some of which are

relevant to the analysis of populism. Evidence from surveys confirms that voters

suffer from several systematic biases. One is a tendency to assign a disproportionate

importance to whatever happens immediately before or after an election. The former

denotes short memory and is an obstacle to learning. Another is “hyperbolic

discounting” which refers to a tendency by voters to choose smaller rewards sooner,

over larger rewards later. This behavior offers a rational explanation for political

shortsightedness.16

Such bias obviously contributes to the success of populism, which

proposes short-term gains at the expense of medium to long-term stagnation.

Joining the debate between Barro (1973) and Nordhaus (1975), Drometer (2006)

developed a model to address the issue of voter shortsightedness and politicians’

incentives. In his model the government offers two types of public goods, a short-term

consumption good and a long-term investment good. Voters exhibit hyperbolic

discounting. Hence, they value the former more than they should. This gives the

incumbent politician an incentive to shift expenditures towards current consumption

in order to be reelected. This in turn results in a suboptimal allocation of public funds.

Drometer defines the bias towards present consumption due to hyperbolic discounting

16 It could be argued that such behavior is a rational response in a highly uncertain and volatile environment such

as Argentina.

27

as a “populist distortion”. He argues that such distortion prevails even if the political

process is perfectly transparent and politicians cannot appropriate any rents for

themselves (the “imperfect agency” distortion).

Based on the theory of expressive voting, Jennings (2011) developed a principal-

agent model of populism that also includes rational and rationally irrational voters. He

defines populism as a set of “bad” policies from a macro point of view but electorally

popular (for example, excessive fiscal deficits financed in an inflationary manner).

According to Jennings, populism is an inefficiency that denotes a degree of

irrationality that cannot be explained by principal-agent models with only rational

voters. His model therefore includes two other types of voters: informed and

“expressive” and uninformed due to rational irrationality. Rational voters vote for the

electoral results that they expect will benefit them the most (or the candidate

associated with such result). Expressive voters are also informed but do not vote

driven by their self-interest because they know that it is not decisive. For example, if

they consider themselves protectionists, they would vote for a candidate that proposes

protectionist policies even if such policies are harmful to their interests. The third

group includes Caplan’s rationally irrational voters (Caplan, 1991). To what extent

voters are rationally irrational or expressive (emotional) is key to Jennings’ analysis.

The model includes three types of politicians: good, bad and populist. Good

politicians know which policies lead to good economic outcomes and want to

implement them, bad politicians also know which policies are good but are corrupt,

and populist politicians only care about getting a majority of the votes.17

In Jennings’

model populism is driven by a uninformed impulse (which could be corrected with

the provision of information) and an expressive bias. Basically, Jennings provides a

simple explanation for the rise of populism: voters chose policies that harm them

economically because they are emotionally attached to them. Such emotionality can

dominate in an electoral setting because voters know they are not decisive. Another

conclusion of this model is that only when expressive voters take honesty into

consideration, good politicians have an advantage over populist ones.

17 The evidence from Latin America suggests that the set of bad politicians and the set of populist politicians as

defined by Jennings are identical.

28

4.2 Country or Region Specific

This subsection includes works on populism that focus on specific countries or

regions. Argentina deserves special consideration, as it is the only country in the

world that over a period of seven decades systematically embraced populism. No

other country (with the possible exception of Venezuela since the beginning of the

21st century) suffered so much and so visibly its negative economic consequences.

18

The earliest studies of Argentine populism were written in the early 1970s. Latin

America also deserves special attention. It is the region where populism has been

most prevalent in the last century. The earliest works on the subject date back to the

late eighties. Economists focused on Latin America made two important contributions

to the analysis of populism: a) suggested a positive relationship between inequality

and left-wing redistributive policies, and b) confirmed the negative impact of such

policies on long-term economic growth. As to the literature on populism in Europe

and the United States, it was mostly published since the beginning of the 21st century.

5.2.1 Argentina

Juan Peron (1895-1974) has been often described as the quintessential populist leader

and was the inspiration for many politicians throughout Latin America (most notably

Hugo Chavez). He ruled Argentina between 1946 and 1955 and between 1973 and

1974 and in both cases he reached power with a substantial majority of the votes.

Since Argentina recovered democracy in 1983, the Peronist party has governed 70%

of the time and has held, on average, a majority of Congress and controlled most

provinces. Although in Argentina, Peronism represents populism’s most electorally

successful format, populist policies were also implemented by the Radical party and

even by military governments. Peronism defies usual categorizations, as its

ideological biases were completely opportunistic. It started as a neo-fascist movement

but over time it incorporated revolutionary Marxist elements and rhetoric, always

appealing to a strong nationalist sentiment. It has proven to be a well-oiled machine to

reach and conserve power.

18 Interestingly, populism has been stronger in the two countries that at one point were the richest in Latin America

and among the wealthiest in the world.

29

Cuban-American economist Carlos Diaz-Alejandro (1970) wrote the pioneering study

of the economic consequences of Peronism. Relying on extensive data, he explained

how Peron’s nationalistic and populist policies accelerated the country’s decline in the

aftermath of WWII. Diaz-Alejandro also highlighted how non-economic

considerations –a prevalent paranoid mentality– impaired collective learning. Instead

of analyzing objectively the sources of the country’s decline and a growing frustration

gap, the elites turned to conspiratorial explanations that blamed foreigners. The

literature on the effects of populist economic policies in Argentina expanded

considerably since then. Mallon and Sourrouille (1975) analyzed how social conflict

influenced the economic policies implemented during 1930-1970, including those of

the Peronist regime.

The first economist to develop a formal model to explain the dynamics of

redistributive populist policies for Argentina in the postwar era was Canitrot (1975).19

Anticipating the conclusions of Dornbusch and Edwards (1991a and 1991b), he noted

that these policies had promoted consumption at the expense of investments.

Consequently, the inevitable result in the medium and long term was lower growth

and rising inflation. Canitrot also incorporated a political economy perspective to his

analysis. He argued that the confluence of interests that provides electoral support to

populism breaks down, “conflicting interests replace complementary ones,” the

explosive inflationary context intensified conflicts and populism ended up “entangled

in its own contradictions”. Canitrot concluded that populist redistribution of income

was “an experience destined to frustration”.20

This frustration sets in motion a vicious

cycle: as a result of populist policies, the frustration gap keeps growing, which, in

turn, increases the demand for populism. This may explain its path dependency in

Argentina. Other attempts to model economic policy and performance in Argentina

since the 1930s that help explain the rise and persistence of populism can be found in

Galiani and Somaini (2010) and Gerchunoff and Rapetti (2015).

Sturzenegger (1991) provided a descriptive analysis of the populist policies adopted

by the Peronist regime between 1973 and 1976 with the objective of trying to evaluate

and understand their possible motivations and long-run implications. He concluded

19 This work was published in Spanish. 20 This is an interesting conclusion coming from someone who actually favored populist policies.

30

that as an experiment in economic policy, it was a complete failure when measured in

terms of stability, redistribution of income, growth, investment and increased standard

of living. Sturzenegger proposed several reasons to explain why policymakers insisted

with these policies (including, irrationality, bad luck, corruption, etc.) none of which

he found fully satisfactory. After and documenting the failure of populist economic

policies in Argentina during the eighties, Fernández (1991) asked himself whether

populist politicians had learned anything from fighting high inflation. His answer: not

much.

Following a methodology partly inspired by Becker (1992) and Glaeser (2004), Di

Tella and Dubra (2010) analyzed the rise and continued electoral success of Peronism

in Argentina despite having led the country into economic decline and political

instability. According to a widely held explanation, Argentine voters behave

irrationally. But, as Di Tella and Dubra point out, accepting such hypothesis would

lead to the conclusion that “democracy is not a reasonable way to elect the country’s

leaders”. Di Tella and Dubra also argue, less convincingly, that rejecting rationality in

political markets logically implies rejecting it in economic markets. Their alternative

explanation for the pervasiveness of populism in Argentina incorporates several

elements not typical of economic models: 1) transactions in the labor markets include

more than just the exchange of work for wages, 2) the possibility that owners not only

do not care about the welfare of their works but in some instances exploit them, 3)

voters (particularly workers who make up a majority of the electorate) want to

maximize something beyond their material welfare: some kind of emotional

satisfaction, and 4) since voters believe that workers sometimes are exploited by

businessmen (i.e., they embrace a Marxist ideology) they demand fairness from

political candidates. Di Tella and Dubra hypothesize that Argentine businessmen are

more likely to misbehave (i.e., be “unfair” to workers) than their counterparts in rich

countries (maybe because of low competition or lower productivity). Therefore the

government must intervene to ensure a “fair” outcome in labor markets. According to

their model, even if voters understand that populist policies are bad from an economic

standpoint, they may still demand them because they “correct” the alleged

“unfairness” of capitalism. When they are not, they experience resentment, which

decreases when government (i.e. Perón) punishes “bad” businessmen with taxes,

expropriations or controls. As Di Tella and Dubra note, Perón systematically

31

promoted the notion of worker exploitation in his speeches. They conclude that by

introducing distortions in the economic system that led to stagnation, Peronism

contributed to perpetuate the beliefs that originally brought it to power. This may

explain its path dependency. Another important conclusion from this study is that the

continued electoral success of Peronism suggests that the welfare loss that voters

experienced in economic terms must have been more than compensated by the

emotional satisfaction obtained by the punishment Peron imposed on “bad”

businessmen. This model is one of the most enlightening applications of the tools of

neoclassical economic theory to the understanding of populism. Although its

assumptions and conclusions are specific to Argentina, the approach could be adapted

to other countries.

Fernández and Monteserin (2014) applied the conceptual framework developed by

Acemoglu and Robinson (2012) to the analysis of Argentine populism. Based on a

historical perspective, they identified certain cultural patterns and institutional

practices since colonial times that help explain the country’s institutional evolution.21

This study also discusses the implications of “historical atavisms” in the articulation

of the populist narrative to understand how populism operates in Argentina and how it

impacts institutional quality.

Ávila (2015) applied the theory developed by Huntington (1968) to explain the

evolution of the Argentine political system. In his typology of political regimes,

Huntington did not specifically mention populism, but rather, included it within a

broader concept that he defined as “mass praetorianism.” This political regime arises

when a society’s level of political participation exceeds its institutional development.

According to Huntington, mass praetorianism is by nature unstable. Huntington

considered the first Peronist regime as its classic example. Ávila hypothesizes that

Argentina’s political instability since 1945 results in a high country risk premium that

penalized investment and reduced capital per worker, labor productivity and per

capita income. The evidence shows that this premium reached its maximum levels

when mass praetorianism prevailed. Ávila also postulates the existence of a

correlation between the nature and duration of a country’s political order and the level

21 This work was published in Spanish.

32

of its fiscal deficit, with the country risk premia being the variable that links both.

Huntington’s theory is useful to explain the rise of Peronism in the mid 1940s and the

recurrence of military coups in Argentina in the second half of the 20th century.

However, it is not as useful to analyze: a) the dominance of Peronism since 1984, and,

b) the emergence of populism in Europe and the US (unless one admits that some

kind of de-institutionalization took place).22

Following the approach of Acemoglu, Robinson and Verdier (2013), Ocampo (2015a

and 2015b) verified the hypothesis that, in Argentina, populist cycles are explained by

agricultural commodity price cycles. The typical narrative proposed by Peronism and

populism in general provides the link between them: the landed oligarchy conspires to

exploit the Argentine people with the help of foreign imperialists. Voters interpret

booms in agricultural commodity prices as a signal that the farming sector –associated

in that narrative with the landed oligarchy– will regain its former economic and

political power and will therefore seek to frustrate the aspirations of “the people”.23

This paper includes the first attempt to quantify with an index the populist bias of

economic policy. The index of economic populism confirms two other important

conclusions: a) since 1983 populist economic policies have been inversely related to

institutional quality, and b) the only period in the last seventy years during which

populist economic policies were not applied was during the 1990s.

Fernández (2016) proposed a novel approach to explain the rise and fall of populism

in Argentina with a “predator-prey” (friend-enemy) model of the price cycle of

livestock, which he considers a proxy for the populist cycle. 24

In Fernandez’ model,

the “people” want to consume meat at affordable prices with the mediation of a

“friendly” government that seeks to “articulate” that demand within a political

discourse to increase its own power. Within this political discourse, the “enemy” is

defined as cattle growers, meat packers and the meat marketing system. These sectors

react by protecting the long-term sustainability of their business and defending their

interests, which in this context are antagonistic to the “people”. Using the

22 Also, if this were the case, the theory cannot explain how a politically developed democracy “regressed”

institutionally. 23 Demand for redistribution also has a simpler explanation: in Argentina commodity price booms have a negative

impact on real wages. 24 This work was published in Spanish.

33

government’s policy towards the meat industry as a proxy for populism has two

advantages. First, given that there is ample data on the livestock cycle, it is possible to

evaluate the impact of government interventions (such as price controls). Second, in

Argentina, the meat-producing sector has historically been one of the targets of

populist policies. In fact, in the populist narrative it is usually banded together with

the “landed oligarchy” as the “enemies of the people”.

Cachanosky (2018) analyzed the macroeconomic and institutional costs imposed by

the Kirchner governments during the period 2003-2015. Ocampo (2018) explored the

historical roots of four psychological traits, cultural values and beliefs prevalent in

Argentine society since its origins that have been functional to the rise and persistence

of populism: individual and group narcissism (the belief that Argentines and

Argentina are superior to the rest of Latin America and that it is destined for

greatness), caudillismo (the predisposition to obey a strongman), anomy (the

inclination to ignore laws and cultural norms of conduct that govern social behavior)

and a strong sense of entitlement (the belief that living well with no hard work or

effort is a God given right). The narrative proposed by Peron and his successors

appealed to and promoted these traits, values and beliefs. Ocampo’s hypothesized that

their prevalence and persistence impaired society’s learning process as described by

North and Denzau (1994). Therefore they created a cultural humus favorable to the

rise and continued electoral success of populism.25

5.2.2 Latin America and Other Developing Regions

During the 1980s a populist wave swept over the largest countries in Latin America

sparking the interest of many economists that specialized in the region. Sachs (1989)

proposed as a hypothesis that high-income inequality generated strong distributive

pressures that led to the implementation of populist policies, which in turn led to

stagnation and instability. In other words, in Latin America populism was the

consequence of a simmering social conflict. A collective inability to resolve this

conflict explained its electoral success. However, the hypothesis that in Latin America

high income inequality was the main factor that explains populism is refuted by

25 Although it is not by definition an economic theory of populism the psychological-cultural explanation can be

helpful to build such theory.

34

Argentina: the country in which the most pervasive and persistent form of populism

emerged was also the one with the highest per capita income, the largest middle class

and one of the lowest levels of inequality.

Desai, Olofsgard and Yousef (2005) used data for 120 countries over the period

1960–2000 to test the hypothesis that conflicts between the rich and poor generated

“populist pressures” for inflationary financing. Their results confirm that there is a

relationship between inflation and inequality that is conditional on the prevailing

political structure. In particular, inequality is positively correlated with inflation in

more democratic political systems, whereas the opposite occurs under non-democratic

regimes. Despite its empirical value, this study doesn’t specifically define populism or

“populist pressures”.

Dornbusch and Edwards (1991c) edited a much-cited collection of analytical and

descriptive studies of populism in Latin America by economists and political

scientists. Included among these works, is their own analysis of the macroeconomics

of populism. Dornbusch and Edwards (1991a) defined economic populism as an

“approach to economics that emphasizes growth and income distribution and

deemphasizes the risks of inflation, external constraints and the reaction of economic

agents to aggressive nonmarket policies.” As noted by the authors, populist regimes

attempted to reduce income inequality via overly expansive macroeconomic policies

that relied on deficit financing, wage and price controls and a complete disregard for

basic economic concepts. This set of policies almost unavoidably resulted in major

macroeconomic crises that ended up hurting those voters they were meant to help.

“How can we explain Latin America’s proclivity toward macroeconomic

mismanagement?” asked Dornbusch and Edwards. Explaining the self-destructive and

cyclical nature of populism in Latin America was one of the biggest challenges facing

any economist or political scientist. Dornbusch and Edwards considered three

potential explanations for this phenomenon: “Is it deeply rooted ignorance on the

mechanics of deficit financing, or is it the deliberate consequence of Machiavellian

politics or, is it, perhaps, the unavoidable outcome of distributional struggles? (1991b,

p.1)”. Left out of their analysis was why voters wouldn’t learn and keep voting for

populist politicians.

35

After a second left-wing populist wave hit Latin America in the early 21st century,

Edwards (2010) took another look at the forces behind it. In his view, Latin

America’s move to the left was the result of a “deep disillusionment” with a number

of market-oriented reforms implemented during the 1990s that failed to deliver

sustainable growth and efficiency. According to Edwards, the failure of these reforms

was the result of misguided and inconsistent exchange rate and fiscal policies. He

reiterated his view that under populism economic performance and social conditions

could only deteriorate. Edwards’ conclusion is that Latin American countries would

split into three major groups: the first includes those in which populism is endemic,

the second, those that are “stuck in the middle”, and the third, those who embrace

reform. The first group will sink into poverty and instability, the second will

experience mediocre growth and the third will converge with advanced countries in

Europe, Asia and North America.

Using data for Brazil, Argentina, Peru and Bolivia from 1970 to 2007, Bittencourt

(2010) tested the hypothesis of what he defined as “the populist view of inflation”.

This hypothesis predicts that in countries with high economic inequality that re-

democratize, the coalition that comes into power will favor redistributive policies.

Since this is usually done through high and unfunded public deficits, or nominal wage

and salary increases, it eventually leads to inflation and macroeconomic instability

which in turn ends up hurting the supposed beneficiaries of these policies. The results

of this study suggest that the implementation of democracy requires an institutional

framework (e.g., constraints on the executive, independent central bank) that raises

the costs of pursuing populist policies.

Based on an econometric analysis of data for 18 Latin American countries, McLeod

and Lustig (2011) tested the hypothesis that “social democratic” regimes in Brazil and

Chile were more successful at reducing inequality and poverty than the so-called

populist regimes of Argentina, Bolivia, and Venezuela. Both groups implemented

policies to redistribute income, but the social democratic regimes’ efforts were more

effective. According to McLeod and Lustig, Argentina and Venezuela started the

1990–2008 sample window with lower levels of inequality, so to some extent recent

reductions in inequality are a return to “normal” levels (as estimated by fixed effects).

Conversely, inequality and poverty in Brazil and Chile fell to historic lows. Second,

36

overall terms of trade shocks were more favorable to Argentina and Venezuela,

therefore the drop in inequality can be partly attributed to the boom in commodity

prices. In essence, this work lends credence to the Dornbusch and Edwards’

hypothesis of the self-destructiveness of left-wing redistributive populist policies.

In a much cited paper, Acemoglu, Egorov and Sonin (2013) argued that the electoral

success of left wing populism in Latin America –defined as in Dornbusch and

Edwards– was the result of weak institutions that lead voters to believe that

politicians, no matter their rhetoric, are vulnerable to being “bought” by the

establishment. In their model, an extreme rhetoric and the support of redistributive

policies are a signal that an honest politician sends to the voters to convince them of

his or her honesty. Its main prediction is that honest politicians that haven’t been

bought by the establishment will propose policies that are to the left of the median

voter. The model predicts that the leftist bias will be larger, when the value of

remaining in power grows, the wider the divergence between the policy preferences

of the establishment and the median voter, and the stronger the perception among

voters that all politicians are corrupt. On the other hand, if voters fear that there is a

secret leftwing agenda, the emerging populism will have an opposite ideological bias.

Acemoglu, Egorov and Sonin provide an original explanation for the rise of leftwing

populism in Latin America but it is one that doesn’t square with the facts. The

evidence of the last century shows that populist politicians tend to be the most

corrupt. An implicit assumption of their model would seem to be that voters are

irrationally ignorant (i.e., do not learn from experience). Also, weak institutions don’t

explain the populist vote in Europe and the US.

Using data for 33 countries Rode and Revuelta (2015) assessed the effect of populist

governments on a country’s economic institutional quality. The former was measured

with an index of populism compiled by Hawkins (2009), while the latter by the

Economic Freedom of the World (EF) Index. Their analysis confirms that a strong

negative relationship exists between both variables, i.e., populism degrades

institutions. There are two major issues with this study. First, Hawkins’ measure of

populism –based on a subjective analysis of the political discourse of political leaders

who are in power– in some cases leads to the strange conclusions that don’t square

37

with reality.26

Second, although there is a negative relationship between populist

regimes and institutional quality, there is no relationship between the rise of populism

(i.e., its electoral success) and institutional quality. Contrary to the hypothesis

advanced by Acemoglu, Egorov and Sonin (2013), populism can emerge in countries

with strong institutions, such as the US, Germany, France or the UK. However,

institutions cannot survive intact under a populist regime. In essence, populism is, by

definition, institutional change.

Grier and Maynard (2016) estimated the costs of populism in Venezuela under Hugo

Chávez using a synthetic control group. Since that control group does not exist, they

synthetically created one using macro variables of countries similar to Venezuela.

Grier and Maynard found that, relative to this group, per capita income fell

dramatically. While poverty, health, and inequality outcomes improved, they also

improved in each of the corresponding control cases and thus they could not be

attributed to Chávez’ policies. Grier and Maynard conclude that these policies

inflicted significant costs on the Venezuelan economy.

Matsen, Natvik and Torvik (2016) analyzed the rise of petro-populism –the excessive

use of oil revenues to buy political support– in Russia, Venezuela and Iran. In their

model, politicians exhibit rent-seeking behavior. Therefore to reap the full benefits of

natural resource wealth, they need to remain in office for a long period. Even a rent-

seeking incumbent who prioritizes his own welfare will want to provide voters with

goods and services if that promotes his probability of remaining in office. While this

incentive benefits citizens under the rule of rent-seekers, it adversely motivates

benevolent policymakers to short-term overprovision of goods and services. The

model predicts that in equilibrium, politicians of all types indulge in excessive

resource extraction, while voters reward policies they realize cannot be sustained over

time. Moreover, such over extraction might even be reinforced as voters become

better informed.

Cachanosky and Padilla (2018) analyzed the impact that leftwing populist policies on

GDP per capita and the HDI index for Argentina (2003-2015), Bolivia (since 2006),

Ecuador (since 2007), Nicaragua (since 2007) and Venezuela (since 1999). The

26 For Argentina it suggests that Cristina Kirchner was not a populist politician.

38

choice of periods and countries is based on their subjective assessment. Cachanosky

and Padilla conclude that populism exacts a heavy economic cost on society. In some

cases, this cost was as high as the one generated by an economic crisis (the experience

of Venezuela shows that it can be higher than that resulting from a major war).

Cachanosky and Padilla (2019) built an index of populism for 12 countries in Latin

America that combines both economic and institutional aspects to test the impact of

commodity prices and economic crises on the existence and intensity of populist

regimes. The evidence suggests a positive correlation.

5.2.3 United States and Europe

In a lengthy analysis of crony capitalism in the US, Zingales (2012) made several

interesting points about populism. First, he argued that populism had manifested itself

in two equally bad extreme formats (p.116). One is reactionary populism, which

stokes “primitive feelings” such as racism, resentment and religious intolerance.

Zingales mentions Peronism and Nazi-fascism as typical examples of this format. The

other format is left-wing populism, which “plays on envy and class warfare, pitting

have-nots against haves in an effort to destroy meritocracy and introduce a new,

political allocation, of resources” (ibid.). This type of populism inevitably leads to

economic stagnation (Mao is proposed as a typical example of this format). Second,

Zingales identified certain key factors that predict the rise of a populist movement:

growing inequality, a struggling middle class and distrust of the elites. Since all of

these factors were present in the United States in the aftermath of the 2008 crisis, he

correctly predicted that some form of populism was “inevitable” (p.28). Third,

Zingales argued that crony capitalism is one of the reasons that lead people to believe

that the status quo is unfair. In other words, it facilitates the rise of populism. Finally,

he claimed that there is a version of populism that can be pro-markets. However, he

recognized that in any other country other than the US such format “would be an

oxymoron (p.109)”. Zingales proposed to channel “populist anger into fighting crony

capitalism and corrupt elites instead of destroying the free market system”. Otherwise,

the US would follow the road to decline under the European or South American

formats of crony capitalism. Some of these observations are more valuable than

others. With respect to the first distinction, it would be wrong to place Peronism as an

extreme form of reactionary populism. In fact, it was a hybrid. Secondly, Mao could

39

have never been a populist because no democracy existed in China. Third, free market

populism has so far proven a chimera. The issue is semantic: what Zingales describes

is popular capitalism, not pro-market populism, which is an oxymoron.27

Fourth,

although Zingales correctly points out that left-wing populism is destructive, he

remained mute about the consequences of reactionary populism. Fifth, although crony

capitalism can certainly exist without populism, it is one of its most distinguishing

features. Aligica and Tarko (2014) explored the strong links between crony

capitalism, rent-seeking behavior, institutions and ideology. Borrowing a term from

Buchanan, they defined populism as “an attitude of nihilism towards economic

organization”, a flexible and polymorphic ideology “that manages to circumvent the

standard ideological expectations of basing one’s arguments in a coherent and unitary

system of thought” (p.170). This is why crony capitalists and rent-seeking oligarchies

find in populism “a wonderfully malleable and effective instrument” to advance and

strengthen their interests.

Glaeser (2012) examined the political risks, related to corruption and populism, of

differing approaches to the problems of monopoly, externalities and market

breakdowns in mortgage insurance by government sponsored enterprises (GSEs) such

as Fannie Mae. In this narrow context, he defined populism as a form of political

favoritism (serving the interest of those citizens who do not pay taxes but received

benefits from the GSEs) and a populist leader as a politician who favors the poor

(although he admits the more realistic alternative that they favor groups that are

strong politically). According to Glaeser, if the political risks of corruption and

populism are sufficiently high (some factors such as ethnic or cultural fragmentation

seem to favor the emergence of both), then laissez-faire may produce higher levels of

public welfare than interventions. Glaeser’s model could potentially be expanded

beyond the narrow issues that are its main focus.

With respect to the recent populist experience in the United States, Di Tella and

Rotemberg (2016) developed a simple model of “paranoid voters” that explains

populism as the rejection of “disloyal” leaders. By adding to a simple voter choice

27 One could argue that Menem in Argentina is evidence that pro-market capitalism can exist. The problem is that

it is not an equilibrium solution. At least it wasn’t in Argentina. Corruption and crony capitalism eventually lead to

institutional degradation and true face of populism emerges.

40

model the assumption that voters are worse off when they experience low income due

to elite betrayal (rather than when it is the result of bad luck) they predict a preference

for incompetent leaders. Basically, populist leaders generally deliver worse material

outcomes but they reduce the feelings of betrayal during bad times. According to Di

Tella and Rotemberg, the vote for Trump was an insurance policy taken by a large

portion of the electorate to avoid being betrayed by the elites, even knowing that his

economic policies could end up hurting them. They cite evidence that suggests that

voters with low levels of education, are more concerned about not being betrayed by a

politician than by his or her level of competence. In other words, they exhibit a

paranoid bias. Although populist narratives always exhibit a “paranoid style” Di Tella

and Rotemberg don’t explore how it arises and becomes so important to voters

(understandably as it is a topic beyond the frontiers of traditional economics).

Based on data from the European Social Survey, Hatton (2016) tested the effects of

macro-level shocks on immigration opinion for 20 countries in the period 2002-2012.

He also tried to ascertain whether surges in right wing populism were associated with

a growing immigrant population. He found that as a whole the shifts in opinion were

mild but with differences between countries reflecting the severity of the recession.

Pro-immigration opinion was negatively related to the share of immigrants in the

population and to the share of social benefits in GDP, but only weakly to

unemployment. These effects were common across different socioeconomic groups.

Interestingly, according to Hatton the timing of the surge in right wing populism and

its distribution across countries does not fit very well with the trends (or lack thereof)

in anti-immigrant opinion. He concludes that continuing rise in support for right wing

populist parties during the recession owed more to growing Euro-skepticism than to a

surge in anti-immigrant sentiment.

In a much-cited recent work, using regional survey data Algan, Guriev, Papaioannou

and Passari (2017) analyzed the impact of the Global Financial Crisis on the vote for

anti-establishment parties in Europe. Their study found a strong relationship between

increases in the unemployment rate and voting for non-mainstream political

candidates. Their main conclusion is that crisis-driven economic insecurity was a

substantial driver of populism and political distrust. The authors recommend that

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national governments and the EU focus not only on structural reforms, but also at

preserving the trust of their citizens and mitigating economic insecurity.

Rodrik (2017) not only tries to identify its economic roots but also explain why in

some countries it is articulated from the right and in others from the left. On the first

question the answer is easy: the dislocations caused by globalization explain much of

the electoral appeal of populist policies in Europe and the United States. But other

causes also act as feedback to globalization such as technological progress, a tendency

towards oligopoly and labor liberalization (with the consequent loss of power of the

unions). Regarding the second question, as Rodrik explains, “the economic anguish

and distributive struggle exacerbated by globalization generate a basis for populism,

but not necessarily determine its political orientation ... The relative relevance of

existing divisions [in society] and the narratives provided by populist leaders are what

gives direction and content to their demands.” That is, these claims can be articulated

from either end of the ideological arc. For this reason, Rodrik says, in Europe right-

wing populism dominates whereas in Latin America we see the opposite. This way of

predicting the ideological bias of populism seems useful. Another important point

highlighted by Rodrik is that even when the dislocation that affects society has

economic origin, its political manifestation may have an ethnic or nativist dimension.

Eichengreen (2017) argued that the election of Trump, Brexit and the recent populist

backlash in Continental Europe have the same root: economic inequality and social

exclusion. Their common denominator is a sense among growing segments of society

of “being left behind.” People see their wages stagnating and jobs becoming less

secure and channel their anger by voting against establishment candidates.

Eichengreen puts the current backlash in historical context by presenting an account

of the rise of populism in the US in the late 19th

century.

Guiso, Herrera, Morelli and Sonno (2017) wrote one of the most ambitious and

comprehensive economic analyses of populism to date. Their objective was to: a)

develop analytical tools useful to study populism, and, b) to identify the key factors

that explain the recent populist wave in Europe and the US. Using individual data on

elections and platforms of political parties in Europe, they analyzed the determinants

of voting for populist candidates or parties (the demand for populism) as well as the

emergence of populist politicians and parties (the supply of populism). They start by

42

identifying three key elements of any populist politician’s rhetoric that reinforce each

other: 1) pretending to defend the interest of the common citizen against the power of

the elites, 2) fomenting feelings of resentment and chauvinism among voters, and 3)

promoting policies without considering their long-term harmful consequences. When

a non-populist politician criticizes a populist policy proposal by emphasizing its long-

term costs, the populist politician replies that this concern is actually driven by the

elite that seeks to defend their interests. This explanation is convincing to the public

when a conspiratorial mentality prevails.

To identify the factors behind the populist vote in Europe, Guiso and his colleagues

analyzed individual data from multiple opinion polls. Their conclusion is that, at the

individual level, voting preferences are fundamentally influenced by economic

insecurity and decreased trust in traditional parties. For the empirical verification of

this hypothesis, economic insecurity is measured by three variables. First, an indicator

of whether the voter has been unemployed in the last five years and was forced to

look for a new job. Second, an indicator of whether it has been difficult for the voter

to live with his or her current income based on an indicator of voter exposure to

globalization according to employment, industry and workforce skills. Finally, they

measured loss of confidence in the political system by the results of the ESS Survey.

When it comes to modeling the supply of populism, the authors note that, in 2000 less

than 70% of the European countries had a populist party, whereas in 2009, they all

had at least one. Following the political science literature, they defined a politician as

populist if he or she: a) promotes the view that “the people” are virtuous and

essentially homogeneous; b) advocates popular sovereignty in opposition to the elitist

government; c) defines him or herself against the establishment or status quo, which

supposedly is contrary to the interest of the people. Guiso et al. found that populist

parties are more likely to emerge when factors that drive the demand for populism

accumulate (supply is somewhat endogenous). Populist parties are also more likely to

emerge in countries facing a systemic crisis that generates economic insecurity among

voters, particularly if their institutional framework is weak and exhibits high political

fragmentation. Conversely, economic crises discourage the participation of voters in

elections, somewhat mitigating the overall demand for populism. As for the ideology

of the populist parties, Guiso et al. argued that it is determined by the availability of

43

“political space”. Once this is determined, the reaction of the non-populist parties is to

reduce the distance of their platform with that of populist “new entrants”, therefore

expanding the aggregate supply of populist policies.

Rodrik (2018) argued that the distinctive trait of populism is that it claims to represent

and speak for “the people,” which is assumed to be unified by a common interest –the

“popular will”– that is opposed by the “enemies of the people”. For right wing

populists the latter are minorities and foreigners whereas for leftwing populists the

financial elites. Rodrik argued that there is “good populism” (of the economic kind,

which seeks to redistribute income) and “bad populism” (of the political kind, which

degrades institutions and seeks to perpetuate itself in power) which “need not always

go hand in hand.” He proposed FDR’s New Deal an example of the first. Two

objections can be made against this hypothesis. First, as stated earlier, income

redistribution doesn’t necessarily imply the existence of populism. Second, the

evidence shows that in order to survive, economic populism requires some positive

and significant level of political populism (i.e., institutional degradation). In fact,

Roosevelt tried to “pack” the Supreme Court because it had ruled against some of his

policies. He failed due to the strong opposition of the press, public opinion and the

Senate itself. In the end, a compromise was reached. It is interesting to contrast this

experience with the one in Argentina during the first Peronist regime. A year after

being elected, Peron fired the Supreme Court justices that opposed him. Both cases

show the natural tendency of populism to undermine the institutions of liberal

democracy. Whether it succeeds depends on how strong institutional and cultural

antibodies are. The “frustration gap” that creates conditions favorable to the

emergence of populism does not simply end with protectionism and redistribution of

income as proposed by Rodrik but by finding a solution to the structural problems that

originated it, i.e. with structural reforms. This is the real challenge, because such

reforms take time and are costly, and therefore, also electorally unpopular. Even if it

achieves Rodrik’s goal of a more equitable income distribution, economic populism

cannot survive for long without political populism, which has a natural tendency to

authoritarianism or totalitarianism. The same criticism that Hayek (1944) leveled

against socialism can be applied to Rodrik’s thesis. Further, even if “good” populism

were viable without “bad” populism, it always has a self-destructive character

(particularly in its left wing variety).

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Pástor and Veronesi (2018) developed a model in which a populist reaction emerges

endogenously. In their model, voters do not like inequality, especially high and

conspicuous levels consumption by the “elites.” Economic growth exacerbates

inequality due to heterogeneity in risk aversion. As a reaction, voters in rich countries

optimistically vote for a populist candidate who promises to end globalization.

Redistribution has limited value in containing the reaction against globalization,

which is identified as the culprit. According to Pástor and Veronesi, countries with

more inequality, greater financial development and current account deficits are more

vulnerable to populism. These authors claim that evidence on who voted for Brexit

and Trump in the 2016 election strongly supports their conclusion.

Using post-electoral surveys from France, Britain and the US, Piketty (2018)

explained how the long-run evolution in the structure of political cleavages gave rise

to populism. In the 1950s, the vote for left-wing parties was associated with lower

education and lower income voters, while, more recently it became associated with

higher education voters. This gave rise to a “multiple-elite” party system in which

high-education elites vote for the “left”, while high-income/high-wealth elites still

vote for the “right”. According to Piketty, this contributed to a lack of democratic

response to the growing multidimensional inequality caused by globalization and set

the stage for the rise of populism. The problem is that nowhere in his paper he

explains what populism is. He vaguely associates it with right wing xenophobia and

identity-based politics. With respect to Brexit, Fetzer (2018) provided evidence that

the austerity-induced withdrawal of the welfare state since 2010 is a key driver to

understand how pressures to hold a referendum built up in the UK and why the Leave

side won. In this case, the author identifies the causes of populism without ever

defining it. Voss (2018) argued that populism is a problem of political alienation

stemming from the incapacity of social democratic parties to comprehensively

represent the working class in the context of increased labor market segmentation. If

underrepresented workers are not sufficiently numerous to be electorally relevant,

right-wing populist protest parties can make use of the representational vacuum by

reframing class-distributional issues along cultural conflict lines. Voss proposes an

inverted hyperbolic causal relationship between labor market segmentation and

demand for populism. He tested this hypothesis by analyzing the electoral effects of

labor market reforms in Germany and Spain.

45

Eichengreen’s The Populist Temptation (2018) is the first book written by a highly

respected mainstream economic historian that specifically focuses on populism in

Europe and the US. Its length and breadth deserve a more detailed review than the

one provided here. Eichengreen places populism’s recent global resurgence in a

historical context, identifies the economic and political circumstances under which it

emerges and proposes some ways to neutralize it. In the first paragraph, he defines

populism as “a reaction of voters against the political establishment, nationalist and

racialist sentiment directed against foreigners and minorities, and a yearning for

forceful, charismatic leadership”. He emphasizes that it is a new phenomenon and, at

the same time, a very old one. Eichengreen’s main thesis is that populists tend to

thrive in the aftermath of economic downturns, when it is easy to convince the masses

of elite malfeasance. But populist solutions tend to be simplistic and economically

counterproductive. Moreover, by arguing that the ordinary people are at the mercy of

extra-national forces beyond their control –international capital, immigrants,

cosmopolitan globalists– populist leaders often degenerate into demagoguery and

xenophobia. Eichengreen’s proposed antidote requires shoring up and improving the

welfare state so that it can act as a buffer for those who suffer most during economic

slumps.

5. The Challenge: Addressing Key Methodological Issues

Having reviewed the relevant body of literature, this section seeks to address two

methodological issues that can hinder further progress in the economic analysis of

populism. The first is definitional, and the second, related to assumptions about voter

behavior.

2.1 Definitional Vagueness

Although much has been written about populism, as the preceding review shos

confusion remains about how to define it precisely. For decades, sociologists and

political scientists have dealt unsuccessfully with this problem (see Mudde and

Kaltwasser, 2017). Consensus has also eluded economists who, as this review shows,

have adopted definitions that, in some cases, are incomplete, and, in others, outrightly

misleading. This definitional vagueness is a hindrance to further progress both on the

theoretical and empirical front. As noted by Rode and Revuelta (2015), while there

46

are no clear definitions and reliable measures of populism, there is a growing need to

study its political, economic, or social consequences empirically.28

The confusion about what is populism was eloquently demonstrated during a press

conference at a NAFTA summit in mid-2016. Mexico’s President Enrique Peña Nieto

criticized populist politicians who wanted “to eliminate and destroy everything that

has been built, what has taken decades to build… by using populism and

demagoguery, they choose the easiest way to solve the challenges of today’s world.

And things are not that simplistic.” His comment was aimed at the yet to be

nominated Republican presidential candidate whose poisonous rhetoric had Mexico

and its citizens as a favorite target. To the surprise of Peña Nieto, President Obama

publicly rebuked him. “I’m not prepared to concede the notion that some of the

rhetoric that’s been popping up is populist,” said Obama. A populist politician is one

who cares about “social justice issues or making sure that poor kids are getting a

decent shot at life or have healthcare.” Obama implied Trump was a chauvinist and a

xenophobe but not a “true populist.” He claimed this label for himself and Bernie

Sanders.29

Peña Nieto was much closer to the truth. By definition, populism is always popular (at

least once at the voting booth), but not all popular politicians or policies are populist.

What distinguishes populism from what’s popular is its contempt for the established

order, the antagonistic relationship it proposes between “the people” and “others”

(who are the enemy of the people) and the institutional and cultural degradation that it

imposes on society. There is left-wing populism (Chavism), right-wing populism

(Nazi-fascism) and chameleonic populism (Peronism). The first promotes class

conflict, the second, xenophobia and/or racism, and the third, an opportunistic

combination of both. In all cases they foster chauvinism, fanaticism and resentment.

The object of the latter usually determines its ideological bias.

The way the ancient Greek philosophers defined populism has stood the test of time.

Aristotle defined as “demagogy” and considered it a degeneration of democracy:

“Most of the ancient tyrants were originally demagogues,” wrote the Stagirite sage.

28 For an political science perspective on the methodological issues that hamper the study of populism see Pappas

(2017). 29 “Read the Remarks From the 'Three Amigos' Summit Press Conference”, Time, June 29, 2016.

47

This institutional degeneration occurs because the rule of law is overturned. “The

demagogues make the decrees of the people override the laws.” Following the

Aristotelian approach, Polybius instead proposed the term “ochlocracy” to describe

the government of the masses. According to Scottish philosopher James Mackintosh,

ochocracy was simply a “degenerate democracy” (1791, p.225).

Although sometimes used as synonyms, today these terms have different meanings.

Demagogy describes political activities or practices “that seek support by appealing to

the desires and prejudices of ordinary people rather than by using rational argument.”

An ochlocracy would theoretically result from successful demagoguery. In reality,

however, the government of the people does not exist. As Arrow (1950)

demonstrated, no voting system can faithfully convert ranked individual preferences

into ranked aggregate preferences. No elected demagogue or self-appointed tyrant can

actually represent “will of the people” (what Rousseau called the “volonté générale”).

Populism is therefore an electoral scam.

Ocampo (2018) defined populism as the painless, simplistic and arbitrary “solution”

to structural problems that a charismatic and opportunistic politician promotes using

an antagonistic narrative that appeals to chauvinism and certain predominant beliefs,

prejudices and anxieties, and that a majority of voters, a) finds convincing and

emotionally appealing, and, b) imposes with its vote when those structural problems

lead to widening divergence between its expectations and reality.30

This divergence is

what I call the “frustration gap”.31

This definition allows us to distinguish between populist politicians, populist policies

and populist regimes. A populist politician is one that proposes the populist solution

to win elections. Populist policies are the effective implementation of such solution.

Although in most cases this solution requires some form of redistribution of wealth or

income, not all redistribution is necessarily populist. The election of a populist

politician doesn’t necessarily make his government a populist regime.32

A populist

regime is one that effectively applies populist policies (which could also arise out of

30 Majority is defined as the minimum number of votes required in a specific electoral setting to secure the power

of the executive. 31 This work was published in Spanish. 32 Trump is the perfect example. Even though he won the presidency with a populist rhetoric, the US remains a

republic.

48

the election of a non-populist politician). An unelected dictator can also try the

populist solution. But this does not mean that his or her regime is populist. Populism

can only rise to power with –and needs to be validated by– free elections.33

A few other clarifications and amplifications are in order. First, the majority is usually

not a homogenous group of low-income voters, but rather, a fragile coalition that cuts

across all income levels.34

In fact, in most democracies, the middle class is key for the

electoral success of a populist candidate. With the passage of time, this coalition can

become a threat to its survival. Populist regimes are by nature politically unstable.

Second, the frustration gap is a necessary but not a sufficient condition for the

emergence of populism. This gap has an objective and a subjective component. The

former can be the consequence of a crisis, a war, an immigration wave, technological

progress, a radical change in the international economic order (e.g., protectionism in

the 1930s or deindustrialization in the last few decades due to globalization).

Basically, the gap is generated by the sudden appearance of structural barriers that

prevent the economy (or society) from functioning as in the past. It can generate a

reaction against a cultural, ethnical or religious threat to the established (or idealized)

order or as a demand for a redistribution of the resources generated by such order.

The gap tends to be wider in societies that impoverished themselves after periods of

prosperity (Argentina and Venezuela), in those in which median incomes have

stagnated for a long time (the US), or in which a majority of the electorate feels that

its cultural or religious values, or ethnic composition, are threatened by “outsiders”

(the US, Western and Eastern Europe). The wider the frustration gap, the more likely

an opportunistic politician will take advantage of it. Since by its failure to implement

structural reforms, populism tends to widen the gap, in certain cases, it can trigger a

vicious cycle that makes it endemic.

The frustration gap also has a subjective component. It can result from unfulfilled

expectations about the present, pessimism about the future or an unfavorable

comparison between the present and an idealized vision of the past. Leftwing

populists tend to emphasize the former whereas rightwing populists underscore the

33 Neither Mao nor Castro were populist leaders but dictators. Maduro is the leader of an authoritarian regime. 34 Even in the case of Peron, who is usually associated with the “shirtless” poor peasants, won his first election in

February 1946 with a significant urban middle class and even some high-income voters that adhered to catholic

nationalism.

49

latter (i.e., they are more conservative). These comparisons are obviously entirely

subjective. To the extent to which they are unrealistic, they generate an “unsatisfied”

demand or what psychologist describe as a feeling of “relative privation”. Arendt

(1974) observed that Nazism and Communism started with “contempt for what you

have” and then tried to convince the masses that “everything must change”.35

Something similar can be said about populism.

The frustration gap is half the story. The other half is the populist leader, who plays a

critical role in the rise of populism. His or her success depends on fostering (or

reinforcing) a feeling of dissatisfaction with the status quo in a significantly large

number of voters. This requires convincing them that they don’t have the standard of

living, respect or recognition, that easily identifiable smaller groups have (which, ipso

facto, become the “enemy of the people”). This is where the populist narrative enters

the story. This narrative explains the origin of frustration gap and how to close it (i.e.,

the populist solution). Generally, the populist leader embodies (sometimes in an

exaggerated way) certain psychological and cultural traits typical of the median voter.

This facilitates the process of identification that Freud (1921) explained so well.

These characteristics do not have a positive connotation. Both left-wing and right-

wing populism reflect malignant group narcissism, a feeling of superiority that

manifests itself as racism or xenophobia (Fromm, 1964). This was as true for Hitler,

Perón and Chávez, as it is for Trump, Erdogan and Orban.36

Recent studies have

confirmed the link between the rise of populism and collective narcissism (Federico

and Golec de Zavala, 2018).

With respect to the nature of the populist “solution” some clarifications are also

necessary.37

First, it is supposedly painless (or costless) for the majority that votes for

it. Second, it is simplistic because it appeals and promotes prejudices, anxieties, fears

and beliefs (overt or latent) that are widely held by the population. Therefore, no

intellectual effort is needed to understand it. This makes it particularly attractive for

35 Although Nazism in its later stage resembled Stalinism, its origin was essentially different. Bolshevism arose out

of a violent revolution and Stalin rose to power through cunning, murder and repression. Hitler instead obtained

the largest representation of any party in the Reichstag through free elections. 36 As a well-known US political consultant explained, Trump is “an avatar” for the “worst instincts” and “deepest

desires” of the American people (Wilson, 2018). A great number of voters channeled their resentment through

him. 37 Defining populism as a “solution” allows for the inclusion of populist manifestations such as Brexit into the

analysis. No populist candidate won an election in England but a populist solution received a majority of the vote.

50

voters with low educational levels. In the mind of those who vote for a populist

candidate, the populist solution cannot fail to achieve its declared objectives. In fact,

its effectiveness seems assured by its simplicity, which rests on the twin pillars of

manichaeism and paranoia: the populist politician’s narrative only admits the

existence of good (the “people” or those that vote for him) and bad (“the enemy of the

people” or those who oppose him), the latter always conspiring to exploit the former.

The inevitable consequence, or undeclared objective, of this narrative is to generate

resentment, which is the psychological and emotional nutrient of populism.

Finally, the populist solution is arbitrary because it requires trampling on established

institutions (formal and informal). The populist leader’s will, which supposedly

represents the “will of the people”, is above any law or established tradition or norm

of conduct. This arbitrariness undermines key building blocks of liberal democracy:

limits on the executive, protection of property rights, freedom of expression and

safeguarding minorities’ rights. Populism’s arbitrariness also manifests itself in

another important way. The populist solution requires that “others” (within or outside

the country’s borders) bear the cost of closing the frustration gap (real or imagined).

This in turn requires identifying them as “the enemy of the people” and making them

pay. Almost by definition, the domestic enemies of the “people” are a minority and

the populist “solution” requires undermining or violating their rights (Lukacs, 2005).

For example, if the enemy is the landed oligarchy or the bankers, a populist regime

can extract resources via direct taxes, expropriation or outright confiscation. If the

enemies of the “people” are immigrants (legal or otherwise) or an ethnic minority it is

possible to deport them, expropriate their assets, prevents their entry into the country

or confine them in concentration camps. When the enemy is external (i.e., a foreign

country or its nationals) it is possible to apply tariffs or nationalize companies owned

by its citizens. War and invasion are the last resort of populism, particularly of the

right-wing variety.

To the extent it convinces an electoral majority, the antagonistic narrative that divides

society between good and evil allows the populist leader to justify any arbitrariness in

the treatment of a minority identified as the “enemy of the people” (i.e., responsible

51

for the existence of a frustration gap).38

As a historian of fascism explained, each

culture “specifies” its own national enemy (Paxton, 2004, p.37). This specification

determines the ideological bias of populism. As one of its most influential intellectual

promoters emphasized, populism is not an ideology but a way of doing politics

(Laclau, 2005). If the enemy of the people can be identified (or defined) along ethnic,

religious or cultural dimensions, it tends to be of the right-wing variety. When defined

by an economic dimension –such as income or wealth levels– with a class-struggle

connotation, it tends to be left-wing. The right wing variety of populism defends an

ideal or imagined cultural and racial status quo, while the leftist attempts to extract

resources from those who support, and benefit from, that status quo.

The experience in the US primary and presidential elections in 2016 eloquently

proves this point. Populism was embraced by leading candidates of both parties.

These candidates agreed on the diagnosis but articulated different explanations of the

origin of the frustration gap and specified who was responsible for it (i.e., the “enemy

of the people”). According to Trump, the American dream was over because of unfair

competition from Mexico and China, which squared well with the beliefs of many

voters.39

Sanders, on the other hand, blamed income inequality and Wall Street

bankers, an explanation that is also shared by a significant portion of the electorate.

Given this diagnosis and identification, their respective “solution” was radically

different: one proposed protectionism (“make foreigners pay”), while the other a

massive redistribution of income and wealth (“make the rich pay”).

The identification of the “enemy of the people” not only defines the ideology of a

populist regime but also its economic policy. Left-wing populists will try to improve

the material welfare of their constituencies by redistributing income and wealth from

high-income voters, while right wing populists will adopt protectionist policies in

goods and labor markets (e.g., curb immigration). In both cases these policies will fail

to achieve their stated objective. The experience from Latin America suggests that

38 Populist politicians conceive politics as described by Carl Schmitt: the only distinction which is valid in politics

is antagonistic (Schmitt, 1927, 26). Although Schmitt was the ideologue of Nazism, his political ideas were

revived by modern ideologues of left-wing populism such as Laclau (2005). 39 Although the evidence shows that automation was a much more important factor. See Acemoglu and Restrepo

(2017).

52

when this becomes obvious to a majority of the electorate, the regime turns

increasingly autocratic. Otherwise it is replaced in the next election.

As anticipated by classical thinkers, populism’s life-cycle has three phases:

demagogy, ochlocracy (implementation of the populist solution) and degeneration

into autocracy. In the first phase, it is a contender for power and, in the last two, an

incumbent. The dynamics of each phase are different and their overall length varies

due to economic, cultural and institutional factors. Not all populist regimes complete

the full cycle (it all depends on society’s antibodies). The first phase always requires

legitimization by the popular vote (even Hitler did it). In the second phase, the regime

seems to achieve the goal of “closing” the frustration gap. But this is a mirage

disguised by favorable exogenous factors or a redistribution of resources at the

expense of minorities that are electorally irrelevant (the “enemies of the people”).

With the passage of time, these groups manage to evade exactions via capital flight

and/or emigration or simply run out of resources (e.g., commodity prices crash).

Meanwhile, the institutional degradation imposed by the populist regime and the

absence of structural reforms ensures that the frustration gap remains open or even

widens. This is when populism’s third phase starts. With free elections, the broad and

growing discontent threatens the survival of the populist regime. The populist leader

and the clique that supports him react to this threat by doubling down: they promote a

conspiratorial narrative (the crisis is due to the perverse action of the enemies of the

people) through state controlled media and systematically abuse executive power (by

violating property rights and restricting press freedom). Taken to the extreme, the

populist “solution” essentially self-destructs. If the host-democracy in which it grows

does not have strong antibodies, populism eventually destroys it, and, in its last phase,

if ever reached, mutates into a dictatorship or autocracy. As Hamilton (1787) warned

in The Federalist Papers, the “men who have overturned the liberties of republics”

commenced as demagogues and ended up as tyrants (p.29). Hamilton’s point is well-

worth emphasizing: history shows that populist regimes, if successful in eroding

institutions, evolve toward authoritarianism (Venezuela under Maduro) or

totalitarianism (Germany under Hitler). Understanding populism requires

distinguishing between these different phases and their respective dynamics.

53

Measuring the occurrence and/or intensity of populism is not easy (for a discussion

see Rode and Revuelta, 2015, Ocampo, 2015a, and Cachanosky and Padilla, 2019).

One approach focuses on the textual analysis of the political discourse of political

leaders, which was pioneered by political scientist Kirk Hawkins (2009). Hawkins

produced a dataset of elite-level populist discourse in over 40 current and past leaders

from a variety of countries across the world, with special focus on Latin America.

According to Hawkins, this measure of populism has high reliability comparable to

standard human-coded content analysis, compares well to common understandings of

actual cases of populism, and is a reasonably efficient technique even in small

samples. However, as the author himself recognized, the methodology leads to

strange results. For example, with respect to Lula, Brazil’s president during 2003-

2010, Hawkins did not find any speech that was strongly populist, and with Cristina

Kirchner, who was president of Argentina during 2007-2015, he found no evidence of

populism in her speeches.

The alternative is to quantify the factors that give rise to populism or the impact of

populist policies. The former would require measuring the frustration gap. However,

there are two problems with this approach. First, the frustration gap is a necessary but

not sufficient condition for the rise of populism. Second, it may reflect considerations

that are not strictly economic (although implicitly or explicitly it generally underlies

them). There are several methods to measure the frustration gap. The first is using

public opinion polls and surveys, such as those regularly published by Pew, Gallup,

World Values Survey, European Social Survey (ESS) or Latinobarómetro. These

surveys generally include metrics of voter dissatisfaction and distrust of the political

system. However, they impose a temporal limit on any study (which maybe

appropriate in the case of Europe or the United States but not for Latin America). A

second approach is to measure the difference between a country’s GDP per capita and

that of a comparable neighbor (or a country historically viewed as a rival). The

disadvantage of this method is that it is less realistic (the general public rarely makes

such comparisons). Another measure of the frustration gap is given by the ratio of the

average to median income, or the percentage of total income that accrues to the top

1% or 10%. In general any indicator that measures the relative deterioration of the

standard of living of the middle class (largest single bloc of voters in most

democracies) is a good proxy. Finally an alternative measure is the output gap or the

54

gap between actual GDP per capita growth its trend from recent decades. Some of

these measures lead to similar conclusions.

The second approach involves measuring the impact of policies that are typical of

populist regimes. However, it can also lead to misidentification: non-populist regimes

(e.g., military dictatorships) occasionally resort to populist policies. This method was

used by Ocampo (2015a) to build an index of economic populism for Argentina for

the period 1916-2015. The index averages the following variables: a) the gap between

official and market exchange rates, which measures both a specific measure (foreign

exchange controls) and a policy outcome (overvaluation of the currency) as well

indicating the regime’s willingness to “correct” market outcomes, b) the level public

spending as a percentage of GDP, which measures both clientelism through subsidies

and other social transfers, c) fiscal deficit as a % of GDP, which measures the degree

of fiscal profligacy, d) the participation of wages and salaries as a % of GDP, which is

a proxy for income redistribution, e) an index of real wages, f) the number of public

sector employees at the national level, as a measure of clientelism, and g) the rate of

government extraction of resources from the agricultural sector. More recently,

Cachanosky and Padilla (2019) built an index of populism for 12 Latin American

countries for the period between 1996 and 2016. The index is made up of two sub-

indices that capture the difference between governments that may be institutionally

populist but economically non-populist and vice-versa. The institutional sub-index

has four components: corruption, rule of law, value and accountability and freedom of

the press. The economic sub-index has three components: government size, revenue,

and taxes on exports. According to Cachanosky and Padilla these three variables

capture distinctive economic aspects of populist regimes. The advantage of this

approach is that, in contrast to Ocampo (2015a), it captures populism’s inherent

institutional degradation. The main issue is to decide which variables should be

included in each sub-index. For example, taxes on exports are a typical measure taken

by populist regimes in Argentina. However, it is much less common in other

countries. Also, the index has obvious limitations when analyzing right-wing populist

regimes (which could be partially solved by adding measures of protectionism and

control of immigration). However, the underlying idea behind these three approaches

could be improved and expanded to make them more useful in cross-country studies.

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2.2 The Rationality Conundrum

The second methodological issue economists need to address when analyzing

populism is what assumption about voter behavior is more appropriate to explain its

rise. In recent decades, psychologists and behavioral economists have challenged the

rationality assumption in economics (see Simon, 1955, Tversky and Kahneman, 1974,

Kahneman and Tversky, 1979, Thaler, 1985). However, mainstream economic theory

assumes that when making economic choices, individuals are essentially rational

maximizers of their material well-being. It would thus seem inconsistent to assume

they are irrational when making political choices. If that were the case, rationality

would be “a bit like the Cheshire cat of Alice in Wonderland: now you see it, now

you don’t” (Di Tella and Dubra, 2010). Moreover, if individuals are rational and

maximize their utility, then, in the aggregate, their decisions should lead to an optimal

social outcome. Both economic theory and the empirical evidence confirm that

populist policies have long-term negative economic consequences, which seems to

suggest populism is a suboptimal outcome of the political market.

Conceptually, there are four possible explanations for the populist vote: a) ignorance,

b) irrationality (or stupidity), c) the consideration of non-economic dimensions such

as feelings and emotions, and, d) the expectation of personal gain via outright

redistribution of wealth and/or income or some kind of direct transfer. Some of these

reasons are not mutually exclusive and could reinforce each other.

The first reason seems plausible since acquiring information is costly. Tirole (2018)

argued that politicians “exploit the ignorance and prejudice of voters”. Since Downs

(1957), rational ignorance has been the underlying assumption of the economic theory

of democracy. Ignorance can also result from the fact that voters rely on models with

causal relationships that are different from reality (or from the models used by

economists). In other words, they have wrong beliefs about how the economy works.

This is what is loosely defined as priors, ideology or beliefs. Ideologies can be

defined as the shared mental models that groups of individuals possess that provide

both an interpretation of the environment and a prescription as to how that

environment should be structured. These models are the product of “cultural learning”

(Denzau and North, 1994). Certain voters may believe populist policies do not

inevitably lead to stagnation, inflation or financial instability and that such outcomes

56

are due to other factors. For example, as farfetched as it may seem, some people

fervently believe that the Venezuelan crisis is due to a US embargo or that

Argentina’s economic decline is due to a conspiracy of the landed oligarchy allied

with US imperialism. A key element of populism is what is known as the “paranoid

style” of politics (Hofstadter, 1996). There is an important distinction between

ignorance and erroneous beliefs. Ignorance can be cured with education. Ideology on

the other hand, like religion, has proven impervious to facts or logical reasoning and

is shaped by culture and other non-rational factors. Ultimately, one would need to

understand how those ideologies are formed and evolve, which again requires

crossing the boundaries of other social sciences such as political science, sociology,

etc. More importantly, it would be necessary to understand what kind of trade-off

exists between erroneous beliefs and material welfare (see below Rabin, 1994, Caplan

2007).

Be it as it may, ignorance, as defined above, cannot explain the vote for populism

over repeated instances, as has been in many countries in Latin America. Given the

high costs of populism, over time it would be less costly for voters to learn (i.e.,

acquire information).

Which leads us to the second reason: irrationality. There is strong evidence from

psychology and behavioral economics that supports the view that systematically

irrational behavior exists in many spheres of human activity.In this context,

irrationality implies that individuals may vote for political candidates or policies

knowing that those policies will hurt their material well-being, i.e. they would not be

maximizing their utility. Psychologists have amply proved that contradiction is a

typical characteristic of homo sapiens. In fact, cognitive dissonance is a mental

discomfort that arises when individuals have inconsistent thoughts, beliefs, or

attitudes. A third possible reason behind the populist vote is the influence of non-

economic considerations (such as resentment, fear, notions of fairness and justice,

etc.). The populist vote is not just a vote for a specific set of policies but, as the

evidence shows, it is also emotionally –one could even say viscerally– charged. It

implies a punishment of some form to certain minorities or foreign countries. There is

undoubtedly a significant non-rational component present in populism (both of the

left and right wing varieties). Incorporating non-economic considerations to the

57

explanation of the populist vote raises a very important question: at what cost?

Understanding the nature of such trade-off would then be the key to understanding

populism. Also, it would be necessary to explain the nature of those non-economic

considerations and how they arise and become prevalent in certain societies at certain

times. This in turn would require the help of history, psychology, sociology, cognitive

science and anthropology.

The fourth reason why individuals may vote for populist candidates –material self-

interest– is obvious. Corruption, patronage, clientelism and crony capitalism play a

big role in most populist regimes. Here we have homo economicus at its best. It can

be useful to make a distinction between the short and long run. In the short run,

populism materially benefits a majority or a large portion of the electorate. However,

by definition, the expectation of an improvement in material well-being can only

explain a majority vote for populism when income/wealth inequality is very high or

the economy is a zero-sum game. We can call this the “Samuelson theorem”. Over

time, populism will impair the material well being of the majority, even if inequality

is reduced. 40

How can we explain the persistence of the populist vote under these

circumstances? There are two possible answers. The first is provided by behavioral

economics: hyperbolic discounting (see below). Voters place more importance on

short-term benefits than long-term costs, reflecting their inter-generational

selfishness. The second answer brings us back to ignorance, irrationality or non-

economic considerations.41

In the long run, even if the majority is worse off, certain

minorities continue to significantly benefit from populism (the ruling nomenklatura,

crony capitalists or targeted constituencies such as artists and public figures). The

assumption of homo economicus perfectly explains the vote of these minorities for

populist candidates.

When explaining the populist vote, economists have relied on one or more of these

reasons. Those who favor the rational choice model tend to rely on reason first and/or

last, whereas those who question it are more inclined to emphasize the two in the

40 As McLeod and Lustig (2011) showed in their study, in Latin America the populist solution has been relatively

less effective in reducing inequality. 41 In countries such as Argentina where over 40% of the population depends from some kind of transfer from

government this explanation carries more weight.

58

middle. In reality, all coexist. What is completely unrealistic is to assume that voters

are homogeneous.

Proponents of the rational choice model in politics recognize that in political markets

individuals operate under different rules and constraints than in economic markets but

that the model remains applicable and makes useful predictions. As Becker (1976)

forcefully argued: “I find it difficult to believe that most voters are systematically

fooled about the effects of policies… voters perceive correctly the gains and losses

from all policies.” In fact, some Chicago school economists have argued that

democratic markets work as well as economic markets and that the existence of

principal-agent and informational problems is greatly exaggerated (Wittman, 1989).

According to this view, any inefficiency is “optimal”. Such methodological stance

would imply rejecting the notion that voting for a populist candidate can be irrational.

Instead, it can be explained by a variety of other factors. Some are exogenous (such

as institutional frictions, principal-agent problems, asymmetric information,

externalities, etc.) and others inherent to voters. The latter category would include

ignorance and strong non-economic preferences. The first can be explained as a

rational decision (information is costly). As previously mentioned, rational ignorance

is one possible way out of the rationality conundrum. However it doesn’t answer an

important question: why do voters even vote? Voters might be ignorant about the

effect of the policies proposed by candidates in an election but they surely know that

their vote will not change its outcome. If voters are perfectly rational, voter turnout

should be close to 0%.42

Within the rational choice tradition, another solution to the conundrum requires

expanding the definition of rationality: individuals maximize their welfare (utility) as

“they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic”.

In other words, rationality doesn’t necessarily imply narrow materialism (Becker,

1992; Rabin, 1994). It is simple a question of adding non-economic preferences to an

individual’s utility function. This is the approach followed by Gleaser (2004) and Di

Tella and Dubra (2010). It offers some promise but also raises questions about how

fairness, altruism, spite, etc. get incorporated into an individual’s utility function and

42 These considerations are obviously less relevant in countries where voting is mandatory and failure to vote is

punished by law like Argentina.

59

why this is more relevant at certain times and in certain societies (Denzau and North,

1994; Chai 1998, 2001; Bénabou and Tirole, 2006). To the extent to which these

values and beliefs are relevant to explain the vote for populist candidates, we would

first need an answer to those questions for the model to yield useful predictions. There

is another problem with this approach. Incorporating non-economic considerations

into an individual’s utility function not only can justify any observed behavior as

rational (it almost eliminates the possibility of irrationality) but also leads to circular

reasoning.

Even within the Chicago School, there is a long tradition of questioning voter

rationality. Knight believed voters were ignorant, emotional and usually irrational

(Stigler, 1982). Coase (1988) put it more bluntly: “I find it difficult to ignore the role

of stupidity in human affairs”. He couldn’t understand why economists had so easily

adopted the view that men acted rationally: “history has shown that a politician who

wastes his country's resources on a grand scale may have a successful career.”. Even

Buchanan acknowledged that with the strict version of homo economicus it is difficult

“to explain the actual behavior of individuals, be it in the market or in politics”

(Kirchgässner, 2014).

Akerlof and Dickens (1982) incorporated cognitive dissonance into a model that

explains how workers in hazardous environments react to the dangers they face and

why these reactions cannot be incorporated into Bayesian decision theory. The model

is based on three propositions. First, individuals have preferences over states of the

world and over their beliefs about those states. Second, they can exercise some choice

over beliefs given available information and they also can manipulate their “desired”

beliefs by selecting sources of information likely to confirm them (“confirmation

bias”). Third, once chosen, beliefs persist over time. The cognitive dissonance model

not only predicts systematic differences in interpretation of given information but also

systematic differences in receptivity to new information according to preferences. Put

simply, if individuals believe something other than the truth, “they do so by their own

choice”. If they made a mistake, they tend to discard information that would suggest

that because “the cognition that the decision might be in error is in conflict with the

cognition that ego is a smart person”. In other words, it is a mechanism to eliminate

dissonance. Akerlof and Dickens recognize that in most economic transactions

60

“cognitive dissonance plays no role” but in many situations –such as advertising and

crime– it does.

North (1993, 1994, 2010) also questioned the applicability and usefulness of homo

economicus in the analysis of institutional choices. The rationality assumption may be

appropriate for individuals making choices in highly developed and competitive

markets but not when making decisions under the conditions of uncertainty that have

characterized the political and economic choices that shape historical change (North,

1994). Measuring and enforcing agreements in political markets is difficult because

citizens and politicians exchange votes for promises. An individual has little incentive

to become informed because his vote is not decisive. In addition, the complexity of

political issues increases uncertainty. Competition is also far less effective than in

economic markets. For a variety of simple, easy-to-measure, and important-to-

constituent-well-being policies, voters may be well informed, argued North, but in

most other settings ideological stereotyping prevails. There is also a fundamental

agency problem in political markets. As principals, voters have difficulty evaluating

what degree of coincidence exists between their objectives and those of the politician

that seeks to represent them. In North’s view, when it comes to most public policy

issues voters rely on very imperfect, and sometime contradictory, models to evaluate

them. His proposed solution to the rationality conundrum is to retain neoclassical

micro-economic theory under the assumption of “bounded rationality” (Simon, 1955).

In North’s view, ideas, ideologies, myths, dogmas, and prejudices have a significant

influence in political and institutional choices (Denzau and North, 1994). Therefore

an understanding of the way they evolve is necessary to develop a useful framework

to understand societal change.

Rabin (1994) modeled an individual’s difficulty of maintaining “false” beliefs with a

cost function such that his utility-maximizing will trade-off his preference for feeling

good about himself with the cost of maintaining his false beliefs. He argued that

cognitive dissonance plays a role in social change and incorporated this factor into a

rational choice model to analyze moral behavior. In an empirical study of US

presidential elections, Mullainathan and Washington (2006) found support for the

relevance of a narrow definition of cognitive dissonance to voting behavior, whereas

Elinder (2007) rejected the hypothesis after analyzing US and Swedish data.

61

According to Glaeser (2003), solving the irrationality conundrum in political

decisions entails bringing economics into psychology and not the other way around.

In his view, errors will be more common when the costs of making mistakes to the

individual are low. Therefore, we should expect more errors in political markets

(because individual votes don’t matter) than in economic markets (because making

foolish purchases is at least somewhat costly).

Caplan’s theory of rational irrationality (1999, 2001 and 2007) offers an alternative

paradigm for voting behavior. His starting point is empirical: when it comes to

politics people hold beliefs that are systematically erroneous even though it would be

relatively inexpensive to correct them. Consistent with the view of Bastiat and the

work of Kahneman and Tversky (1974), Caplan argued that individuals exhibit

systematic cognitive biases that affect their voting decisions. These surveys suggest

that American voters exhibit four main biases: 1) they do not grasp the “invisible

hand” of the market, with its ability to harmonize private greed and the public interest

(anti-market bias), 2) they underestimate the benefits of interaction with foreigners

(anti-foreign bias), 3) they equate prosperity with employment and not with

production (make-work bias), and, 4) they are overly prone to think that economic

conditions are bad and will get worse (pessimistic bias).43

In Caplan’s view, economics can handle irrationality the same way it handles

everything: with prices and preferences. Irrational behavior is like any other normal

good: when its price is low, its demand will tend to be high. Holding erroneous

beliefs, such as racism, is rational as long as the costs of maintaining them are low. In

fact, holding erroneous beliefs may actually generate a certain psychological

satisfaction. Rational irrationality theory suggests that it is entirely rational for people

to vote according to beliefs that are erroneous (and collectively harmful) but make

them feel good. Basically, voters have “two arguments in their utility function:

personal wealth and loyalty to their political ideology (2007, p.17).”44

Voters are

worse than ignorant: they are irrational, vote irrationally, and, more importantly, says

Caplan, they have no interest or incentive to correct their beliefs. “Like the adherents

43 Surveys results from World Values Survey and Latinobarómetro suggest that these biases are strong and

prevalent in many countries in Latin America. 44 Although Caplan doesn’t explicitly recognizes it, this statement implies an agreement with Becker’s approach to

broadening the definition of utility (Becker, 1992).

62

of traditional religion many people find comfort in their political worldview, and greet

critical questions with pious hostility (Caplan, 2007 p.16).” Since they know their

vote is not decisive, they vote for whichever political candidate shows “greater

affinity” with their beliefs. If a significant number (or a majority of voters) behave in

this way, representative democracy cannot be expected to systematically deliver good

economic outcomes. Democracy fails “because it does what voters want. In economic

jargon, democracy has a built-in externality. An irrational voter does not hurt only

himself. He also hurts everyone who is, as a result of his irrationality, more likely to

live under misguided policies (2007, p.3).”45

Even though Caplan didn’t analyze or consider populism, according to his theory, it

would be rationally irrational for an individual to vote for a populist candidate even if

she knew that over the long term populist policies would be harmful to herself and the

economy.

An alternative (or complement) to the rational ignorant voter of Downs and the

rationally irrational voter of Caplan is the expressive voter of Brennan and Lomasky

(1993). According to this theory, voters are motivated by considerations that are

independent of the result of an election (and the policies that could derive from it) and

are more directly and immediately linked to the act of voting for a particular

candidate or platform. The basic idea is that voting, or voting in a particular way, may

“express” some aspect of a voter’s beliefs, values, ideology, identity or personality

which is independent of the impact that such vote could have on the outcome of the

election. Such “expression” may be valuable to the individual and provide sufficient

motivation to vote. However, accepting that expressive motivation plays a key role in

voting doesn’t tell us much about how individuals vote. Brennan and Hamlin (1998)

concluded that expressively motivated voters are moderates and instrumental voters

tend to be extremists. Drinkwater and Jennings (2007) concluded that the opposite

was more likely.

The publication of Daniel Kahneman’s Thinking fast and slow (2011) was hailed as a

“major intellectual event” that would have “enormous impact” on applied economics

and policy making (Shleifer, 2012). Building on earlier work in cognitive psychology,

45 Caplan’s definition of irrational equates with the definition of stupidity proposed by Cipolla (1976).

63

Kahneman posited that when making decisions humans rely on two modes of

thinking: 1) System 1 (or fast thinking) is intuitive, operates automatically, tends to

require little effort, and relies on shortcuts and heuristics to make judgments, 2)

System 2 (or slow thinking) allocates attention to the effortful mental activities that

demand it, including complex computations, and serves as a mental check on System

1. According to Kahneman, System 1 generally dominates. In politics, this dominance

is more prevalent among uninformed voters “who watch a lot of television” (2011,

p.91). Intuition is automatic and reactive, not optimizing. This implies that decisions

made under its influence don’t even fit Simon’s model of bounded rationality. This

has important implications for the analysis of the populist vote. Economists have yet

to introduce Kahneman’s dichotomy to their voting models. This is not the case with

political scientists. A recent study involving focus groups in the UK suggests that

predominance of the intuitive mode may be having a “long-term corrosive effect on

citizens’ attitudes to politics and their faith in the political system” (Stoker, Hay and

Barr, 2016). Political marketing strategies and social media seem to reinforce this

trend. Although not mentioned in this study, the intuitive mode is also the one most

favored by (and most favorable to) populist politicians. This is certainly one area that

deserves more attention by economists.

In summary, a methodological asymmetry between economic and political decisions

can be justified not only by the different nature of the choices faced by individuals in

economic and political markets but also by the significant structural differences that

exist between those markets. Assumptions about voter rationality may provide the

most fundamental criteria to classify the contributions made by economists to our

understanding of democracy and populism. It is important to note, however, that such

assumptions do not have normative implications. Someone can act rationally and still

do harm (as Becker argued, criminals follow perfectly rational behavior). On the other

hand, assuming that voters sometimes act or behave irrationally, does not imply

questioning the legitimacy or advantages of democracy. Another assumption typical

in economic models is that voters are homogeneous in the same way consumers are.

This is probably more unrealistic in political markets than assuming voters have

unbounded rationality.

64

6. Conclusion

Economics plays a critical role in any explanation of the rise (and fall) of populism.

However, proper attention to economic forces tends be absent from studies written by

political scientists and sociologists. Economists have not filled this gap because for a

long time populism remained a marginal field of research. Despite their relative lack

of attention, as this review attempts to demonstrate, economists have made a valuable

contribution to the analysis of populism. The populist wave that hit much of the

developed world in recent years sparked the profession’s interest in the subject,

leading to greater depth and breadth in their theoretical and empirical analyses. To

make further progress, economists need to address two methodological issues. One is

definitional and the other related to assumptions of voting behavior.

The review also shows that an agreement over the definition of populism remains

elusive (and in some cases economists have proposed and used are inaccurate or

misleading). To some extent, the same has been true for sociologists and political

scientists. It would be unrealistic to expect economists to do better in this regard.

However, certain clarifications are in order. The first is obvious, but worth repeating:

popular policies do not necessarily imply populism (although populism must be

popular to win elections).46

Second, a political candidate cannot be defined as populist

simply, or only, by his incompetence to carry out reforms, his opportunism, his

popularity, his xenophobia or his charisma. Third, populism is more than a set of

macroeconomic policies: it is a sub-optimal “solution” to structural problems that

sooner or later requires some form of institutional degradation and leads to stagnation.

Fourth, the evidence shows that the distinction between political and economic

populism (or good or bad populism as Rodrik proposes) is not sustainable over time.

Fifth, populism is not an ideology but a way of doing politics. Its ideological bias is

culturally and temporally idiosyncratic

The second issue is how to solve the rationality conundrum. If populist policies are

detrimental to economic growth (a conclusion with which most economists seem to

agree), populism can be considered an inefficient outcome of political markets. If

46 Popularity in this sense means the minimum number of votes required in a specific electoral system to gain

executive power.

65

individuals act irrationally when it comes to making economic choices, economists

must provide a convincing explanation of why they don’t act rationally when voting

(or vice versa). Several schools of thought have explained why the asymmetry is valid

both logically and empirically. Assuming voters are rational leads to different

conclusions about the fundamental cause behind the rise of populism.

Narrow rationality remains a powerful assumption. Some economists argue it should

not be abandoned but expanded. When it comes to individual behavior in political

settings many of the papers reviewed here recognize the existence of different classes

of voters (e.g., rationally rational and expressive). Others incorporate emotions and

beliefs in voters’ utility functions. This approach offers a lot more promise than the

traditional rational choice model (see Di Tella and Dubra, 2010). However, these

models also have limitations because they don’t explain why certain beliefs and

emotions are critically important to voters at certain times and in certain countries.

Finally, rationality doesn’t seem to square with the visceral reaction that populism

generates among voters.

The concepts and tools of economic theory have proved useful to predict the

conditions under which populism will likely arise, what ideological bias it will take,

what kind of policies it will adopt and what will be the consequences such policies.

They are also helpful to identify and model the supply and demand of populism.

However, if defined narrowly, the economic analysis of populism faces certain

limitations. The most valuable theoretical and empirical contributions economists

have made to the understanding of this complex phenomenon have incorporated

concepts and tools from other social sciences such as history, political theory,

sociology and social psychology.

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